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Bridging The Gap
Three ways Trump could juice US economy
  Wednesday 21 August, 2019
Three ways Trump could juice US economy

Fears of a possible recession on the horizon has led the White House to begin considering several emergency measures to kickstart the US economy.

Donald Trump likes to claim credit for "the greatest" economy ever which he hopes will help him win re-election in 2020. America's current expansion is the longest in US history. More Americans are in work. They're being paid more. And they're spending more.

Yet on Tuesday, the president was talking of the need for stimulus.

By Wednesday he had reversed himself, backing away from tax cuts to boost the economy.

His contradictory messages reflect his growing concerns about a possible slowdown - or even a recession.

If many economists agree on one thing it's that financial markets are flashing red, there is weakness overseas and something may need to be done.

So what options are the administration's top economic aides discussing to avoid an election year recession?
What tax cut is Trump mulling?

Speaking to reporters at the White House on Tuesday, President Trump said his administration is looking at a temporary payroll tax cut to help the economy. One day later he denied it was on the table.

Yet if he changed his mind again, the appeal is simple - if you're worried about a recession, a payroll tax cut can boost consumer spending, which accounts for about two-thirds of the US economy.

Most American employees pay a "payroll tax", which is separate from their federal income tax and is used to fund healthcare and benefit programmes for the elderly - such as Medicare and the Social Security Administration.

But not everyone is convinced that is the right medicine for the patient given that American consumers are still spending happily.

"Right now, investment is lagging, not consumer spending," says Kyle Pomerleau, Chief Economist at the Tax Foundation. "As such, a payroll tax doesn't seem well timed."

He suggests that it was Trump's escalating trade dispute between China and the United States that was holding up businesses' decision making.

"He might have better luck if he were to rescind some of his tariffs, which are probably causing some uncertainty for businesses and impacting investment."
Has this been done before?

The policy was last used during the Obama administration in the wake of the 2008 financial crisis when it faced huge pushback from Congressional Republicans.

In 2011 and 2012, the former president lowered the payroll tax from 6.2% to 4.2%, immediately giving American workers more disposable income.

The White House is nervous that something bad may happen to the economy. As an insurance policy, it floated the idea of using the policy Republicans once opposed before walking it back.

"If the mere suggestion that a recession might threaten their own election prospects is enough to send Republicans rushing to embrace an economic stimulus tool they opposed during the Obama years, that would be blatantly hypocritical and nakedly political," Steve Wamhoff at the Institute on Taxation and Economic Policy wrote in a recent blog post.

Most tax experts agree that cutting the payroll tax can help in a downturn. But if it becomes routine, it could raise longer term questions about the funding for programmes like Social Security - a key component of the US social safety net.

US economy under Trump: Greatest in history?

And like all tax cuts, a payroll tax cut would also be costly. It would add to the deficit, but just how much? The Committee for a Responsible Federal Budget, an independent public policy think tank, has done the maths.

They estimate that cutting the employee-side Social Security payroll tax by two percentage points for two years would cost nearly $300bn, before interest.

All that red ink could make the government less effective at responding to a recession.

"There are cheaper and more progressive ways to stimulate consumption," according to Eugene Steuerle, an Institute fellow and the Richard B Fischer chair at the Urban Institute.

Source: https://www.bbc.com/news/world-us-canada-49402311

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