Donald Trump has issued a series of executive orders to provide “relief” because Congress can’t agree on legislation.  So Trump has done what previous presidents have done for a long time. He made dictates (executive orders) with no Congressional authorization.  It is unconstitutional.

Some might say that Trump’s orders are more blatant than ever before.  He is essentially changing the tax code without Congressional permission, and he is also spending money that has not been approved.

Trump’s executive orders bring back the federal government’s supplemental unemployment benefits ($400 extra per week instead of $600 extra per week).  They will extend a prohibition on evictions (sort of) and will defer student loan payments.  Most interesting is the order to suspend the payroll tax from September 1 through the end of the year.  It is this last item in which this article will address.

To be sure, Trump’s orders are quite authoritarian and perhaps unprecedented, but more in terms of taxation and budgeting.  I can easily think of worse things that presidents have done.

Just going back to Obama, he started major wars without any Congressional authorization, let alone an actual declaration of war.  The two major ones that stand out to me are Libya and Syria.  Obama didn’t exactly use an executive order.  He just commanded a start to these wars. In fact, Congress had previously refused to authorize a war in Syria, so Obama just waited a little while and then did it anyway.  This is far worse than anything Trump has done.

I want to focus on the payroll tax cut, if that is what you call it.  To quote this article, “The order defers the employee’s obligation to pay a 6.2% Social Security tax per paycheck.  It applies to people who ‘generally’ make less than $4,000 every two weeks, which works out to an annual salary of $104,000.”

This is interesting first because the Social Security payroll tax is highly regressive. It hits every W-2 worker. It hits self-employed people and contractors worse when they have to pay double because they are also considered the employer.  But the Social Security payroll tax, unlike the Medicare tax, is capped.  In 2020, the cap is $137,700.  Anything you make beyond that is not subject to the payroll tax.

This is also an interesting political move by Trump.  This tax hits most workers, and he knows it.  Since this is an executive order, Trump couldn’t get away with just reducing the tax.  Instead, he is instructing the Treasury not to collect it.  Right now, it is technically a deferment, which means it will all have to be paid at the end of the year by employees.

But who is going to want to do that?  Who wants to have to budget for that?  And it’s not like you can stick it in a high-interest savings account in the meantime.

This will be like property taxes that you don’t escrow.  This is what I do, but I know most people use escrow.  The mortgage company estimates your property taxes and you pay the monthly amount with your regular payment each month.  You may owe a little or receive a small refund once property taxes are due each year, but even here the mortgage company will often just make a small adjustment to your escrow payments each month.  I don’t escrow, so I have to write a big check once a year to my local tax collector.

If you make $1,000 per week ($52,000 per year), then you would currently pay (have deducted) $62 per week for the Social Security payroll tax.  If Trump’s order goes from September 1 to December 31, that will be about 17 weeks.  That would total $1,054.  It’s amazing how much we pay.

How do you think most Americans will feel having to write a check for over a thousand dollars after the year is over for this 4-month timeframe?  Sure, they will be getting an extra $62 per week in their paycheck, but do you think everyone is going to set this aside and budget for this?

This brings in to question whether employers will actually reduce the payroll tax when processing checks (direct deposits) for their employees since it is uncertain if the tax cut might just be a deferment.

Trump says he wants to eventually make this permanent.  I don’t know if this would mean just making it permanent for this 4-month time period (not a deferment), or if it would mean forever getting rid of the tax.

Trump said that if he is re-elected in November, then he will make it permanent.  In other words, if you vote for the other person, then you may have to make a big payment after the year is over.  I don’t know if this is politically smart, or if he is overplaying his hand.

Less Taxation, More Spending

The long-term implications with this order deal with something I have discussed several times before.  As the spending continues to increase, which has been especially dramatic this year, the direct taxation seems to be going down.

The payroll tax is a significant portion of tax collections for the Treasury.  If the employee portion of the payroll tax is eliminated, this will likely reduce tax collections significantly.  And since spending isn’t going down, the annual deficit will continue to increase.

We are already at a point in 2020 where the federal government is funding over half of its expenditures through debt instead of tax collections.  A permanent elimination of the employee payroll tax for Social Security will further this.

At this point, I ask why the federal government doesn’t just eliminate all taxes and fund the entire budget through debt, most of which is bought up by the Federal Reserve, at least at this point.

This used to be a rhetorical question, but it doesn’t seem all that rhetorical any longer.  It is becoming closer to reality.

There is a part of me that favors this.  I don’t want to see hyperinflation, but I do want to see the Fed and the government pay the price for their inflationary policies.  Up until now, it seems they have largely gotten away with just issuing trillions of dollars in new debt with no noticeable consequences.

Now, I know that our living standards are far lower than they should be because of this.  I know the government has served to misallocate resources on a large scale.  I know that many people and businesses were already in trouble before 2020 due to a lack of savings.  But up until this point, we haven’t see rampantly high consumer price inflation.

If the federal budget is completely financed with new debt, I believe the breaking point will be reached much faster.  Private investors and foreign central banks can only buy so much.  It would leave the Fed to buy up most of the new debt, which would be many trillions of dollars per year.

I doubt the Fed could get away with this for more than a few years.  If the Fed has to continually create $5 trillion or more per year to help finance the federal budget, it would be hard to imagine that we wouldn’t see high price inflation.

Eventually, the Fed would be forced to scale back or face massive price inflation.  As bad and as stupid as the Fed is, I don’t think the Fed members want to risk hyperinflation.  So Congress would be forced to cut back its spending dramatically or raise taxes.  Maybe we would see a combination of both.  But at least it would put a cap on the reckless spending coming out of Washington DC.

This is why I tend to favor this approach of the Fed financing everything.  I think financing the budget with debt and inflation is a disastrous policy, but it’s happening anyway.  The government is experiencing virtually no limits on what it can do.  By eliminating more direct tax collections, it will speed up the time to the day of reckoning where Congress is finally forced to scale back significantly.

I have said for several years that Trump does things that tend to expose the establishment, even if inadvertently.  Maybe this is another one of those things.