The lurking red tape problem
Cutting tariffs is better than cutting payroll taxes to boost the economy
The longest running economic expansion in United States history continues. The latest jobs report confirms it. Average wage growth has exceeded 3 percent for 11 straight months, while wages have grown at more than twice that pace for the lowest 10th percentile of wage earners, or people making about $12 an hour. That is equivalent to a roughly $1,500 raise for someone earning less than $25,000 a year.
Consumer confidence and consumer spending are strong. Unemployment is low, and businesses continue to expand their payrolls. All of this to say that it is far from clear that the American economy is entering a downturn. The sky is certainly not falling. But even if we are sliding ever so slowly into a recession, a payroll tax cut would do nothing to boost the economy. Instead, cutting tariffs on goods should be the first priority.
The dark economic clouds now visible on the horizon have little to do with payroll taxes. Rather, these problems are simmering and international. The Chinese economy is slowing due to demographics and the inevitable mismanagement of central planners, while the Japanese economy continues to limp along in the face of high debt and a pending value added tax hike. Germany has entered a recession, while the European Union continues to struggle with the pros and cons of Brexit.
At home in the United States, the new and threatened tariffs, which are really taxes on American consumers and businesses, are a drag on our economy. The 25 percent tariff on nearly all steel imports last year, for example, increased steel prices by as much as 40 percent in the following months. American consumers and businesses paid those higher prices, and domestic steelworkers are not seeing the promised benefits.
But the problem with tariffs runs deeper than higher prices. Businesses need certainty to plan, invest, and hire. The upheavals to global trade policy have created economic uncertainty and increased costs the world over. Without some semblance of normalcy and a credible commitment that it will stay that way, business investment will continue to drop. A payroll tax cut cannot fix the damage caused by the current trade policy. This is not to say that we should not cut taxes in general. Letting people keep more of their money is always a good goal for lawmakers.
But cutting the payroll tax is designed to stimulate the economy by putting more cash in pockets and lowering the cost of employment. The latter should lead to an increase in hiring. But these are not the areas where the economy needs help. Consumer spending has been strong, and employers have historically high numbers of open jobs, with a million more jobs available now than there are people looking for work.
The last time we tried a payroll tax cut, the Congressional Budget Office estimated that for each dollar of forgone tax revenue, the economy would grow between 30 cents and 90 cents and cost more than $100,000 for each job created. If Congress wants to cut taxes, they should start with the ones that are most harmful to the economy. Taxes on trade, taxes on businesses, and taxes on saving and investment should take priority. Unfortunately, President Trump and House Speaker Nancy Pelosi agreed to spend $322 billion more than the law allowed. Even without the recent budget busting deal, the federal government was nearing trillion dollar annual deficits. That is the worst level in the developed world.
In the first 10 months of this year, federal tax revenue will have increased by 3 percent, compared with last year, thanks to the growing economy. Over the same time period, federal spending grew by 8 percent and is expected to grow faster in the future. Congress must control spending. Our strong economy is a testament to the power of strong growth policies in areas where business taxes have been cut and regulations rolled back.
President Trump should continue his legacy of economic growth with a commitment to reducing spending, eliminating tariffs, and doubling down on his efforts to cut red tape. Each of these growth policies are the best medicine to avert, and if need be, climb out of a recession, by removing the government from standing in the way of American innovation, new opportunities, and continued wage growth for workers at all levels.
Adam Michel is a senior policy analyst focused on tax policy issues with the Grover Hermann Center for the Federal Budget of the Heritage Foundation.