White House officials are mulling a temporary payroll tax cut as a way to ward off an economic slowdown, according to the Washington Post.
The economy has slowed since the first-quarter pace of 3.1 percent and now appears to be on track for growth of around two percent for the year. Fears of a recession, however, have been rising, with economists now saying that there is about a 35 percent chance the economy contracts next year. The yield curve briefly inverted last week, often a signal that a recession looms.
According to the Washington Post, the talks are in their early stages. A cut to payroll taxes would have to be approved by Congress and could not be done by the White House alone.
Americans employed by businesses pay a 6.2 percent “payroll tax” on their earnings, with their employers paying the same amount. Self-employed Americans pay a 12.4 percent tax. That tax is levied to finance Social Security. Americans also pay a Medicare payroll tax of 1.45 for employees and 1.45 for employers.
In an effort to stimulate the economy, Congress and the Obama administration temporarily cut the employee side of the Social Security payroll tax by two points in 2010. The Social Security trust funds were “made whole” for the lost payroll tax revenue by a transfer of general revenue, meaning the tax cut was financed through larger deficits.
That temporary cut was originally set to expire at the end of 2011 but was extended through 2013.
A study by economists Christina Romer and David Romer found that tax cuts are effective at providing anti-recessionary economic stimulus. Payroll tax cuts work by immediately giving Americans a boost in take-home pay–at least some of which tends to be spent into the economy.
Very low-interest rates on government bonds, particularly long-term Treasuries, may make a payroll tax cut even more attractive.