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What Comes AFTER a Payroll Tax Cut?

News reports suggest that the Trump administration is proposing a payroll tax cut as a means of offsetting potential economic harms from the coronavirus.

Payroll tax cuts do have the effect of letting people keep more of their earnings, but we’re not enthusiastic about a payroll tax cut. For one thing, payroll tax cuts just don’t work very well as economic stimulus.

That’s because such tax cuts reflect Keynesian rather than supply-side thinking. Keynesian “stimulus” involves borrowing money to inject cash into the economy. And while more cash moving around might be a good thing, economic growth depends on new investment and business creation and expansion.

But we do have a couple of thoughts about what might come AFTER a payroll tax cut.

First is a concern: The federal government is flat running out of tools to juice the economy. Interest rates are already extremely low, the Federal Reserve has already tried quantitative easing, we’ve already cut corporate taxes and passed expensing of business investment. The toolbox for juicing the economy is just about empty.

Maybe it’s time for policymakers to start focusing on real structural reforms that result in long-term prosperity, instead of constantly relying on short-term fixes.

Which brings us to our second thought, an idea that we’ve proposed several times: Whenever a payroll tax cut comes to an end, that would be a perfect time to implement personal retirement accounts, which would begin solving our looming Social Security crisis.

Let’s say there is a payroll tax cut of 4 percentage points. Instead of simply reverting to the status quo at whatever arbitrary date politics determines for it to end, divert that same 4 percentage points of payroll taxes into personal retirement accounts, supervised by the Social Security Administration but invested in approved mutual funds. The payroll tax cut would remain, but the money would be going toward investment and wealth creation, which would actually help grow the economy.

They could even be called Trump Retirement Accounts. And eventually they would grow large enough to offset some or all of Social Security’s future liability to personal account holders.

All the hard work has already been done on how personal retirement accounts would operate, how they could be made absolutely safe, how they would allow low- and middle-income workers their first real opportunity to build wealth, and how they would rescue future retirees from Social Security’s eventual meltdown.

A payroll tax cut would be the perfect glidepath to implement personal retirement accounts.