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Aug. 26, 2019, 2:03 p.m. EDT

This is exactly how much a payroll-tax cut would help the average American

A simulation by the Urban-Brookings Tax Policy Center explored tax measures that could help mitigate the effects of a recession

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By Andrew Keshner


Mark Wilson/Getty Images
The Trump administration is reportedly looking at a payroll tax cut.

Trump administration officials are reportedly looking into a payroll-tax cut as certain market indicators and economists signal a recession could be around the corner.

The Obama administration reduced the payroll tax in 2011 and 2012, as part of its effort to stimulate recovery from the Great Recession, lowering the rate to 4.2% from 6.2%; that administration used money from the Social Security Trust Fund to compensate for lost revenue.

A 2% cut in the payroll tax would benefit 121 million workers, giving each household a $1,043 yearly benefit.

Now Trump administration officials say they are considering a cut after initially denying such plans. “Many people would like to see that,” President Donald Trump said Tuesday.

One day earlier, senior adviser Kellyanne Conway told reporters, “The fact is, the fundamentals of our economy are very strong.” The U.S. is in the 10th year of a bull market with unemployment near 50-year low.

But what if the U.S. is gripped by another recession, something many economists believe is just around the corner? That, economists say, could help force the hand of the White House to cut payroll tax in order to help stimulate the economy, said Mark Mazur, director of the Urban-Brookings Tax Policy Center.

One simulation from the center sheds light on the likely effects of such a cut. A 2% payroll-tax cut would benefit 121 million workers, giving each household an additional annual sum of $1,043 in 2019 dollars. However, nearly three quarters of a 2% cut in the payroll would benefit the highest-earning households, those in the top fourth and fifth quintile of earners.

Just under half of a payroll-tax cut would go to households making at least $83,000 a year, according to research.

The simulation explored various tax tactics that could be used to help mitigate the effects of a recession. By contrast, a refundable tax credit yielded a $583 benefit to 111 million workers and an enlarged version of the same credit benefited 92 million workers with a $1,160 average payout.

An expanded version of the earned income-tax credit would help 31 million workers with a $1,710 average annual benefit while an extension of unemployment insurance payments would benefit 13 million workers with an average benefit of $6,824, Mazur added.

Don’t miss: Social Security is already in trouble — and a payroll tax cut might only make it worse

Of course, a payroll-tax cut would also comes with a cost. The government would forgo $123 billion in missed yearly revenue, the simulation said. The second-most expensive proposal would cost $112 billion, according to the Tax Policy Center.

Different estimates say the cost of a payroll tax cut is higher. One estimate says it would cost the feds nearly $300 billion over two years, before interest.

Andrew Keshner is a personal finance reporter based in New York.

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