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White House officials eyeing payroll tax cut in effort to reverse weakening economy

President Trump on Sunday in Morristown, N.J. (Patrick Semansky/AP)

Several senior White House officials have begun discussing whether to push for a temporary payroll tax cut as a way to arrest an economic slowdown, three people familiar with the discussions said, revealing growing concerns about the economy among President Trump’s top economic aides.

The talks are still in their early stages and have included a range of other tax breaks. The officials also have not decided whether to formally push Congress to approve any of these measures, these people said, speaking on the condition of anonymity because they were not authorized to disclose internal discussions. But the White House increasingly is discussing ideas to boost a slowing economy, they said.

Even though deliberations about the payroll tax cut were held Monday, the White House released a statement disputing that the idea was actively under “consideration.”

Amid economic indicators signaling a potential recession, White House advisers were bullish discussing the economy on the Aug. 18 Sunday shows. (Video: JM Rieger/The Washington Post)

“As [National Economic Council Director Larry Kudlow] said yesterday, more tax cuts for the American people are certainly on the table, but cutting payroll taxes is not something under consideration at this time,” the statement said.

The statement and the internal discussions over the payroll tax cut are part of a rapidly evolving effort by the White House to exude confidence about the economy’s strength while simultaneously hunting for ways to bolster business and consumer confidence. Business spending already has pulled back, in part because of fears about the trade war, but consumer spending has remained robust. If Americans begin to tighten their belts later this year, the economy could suffer new strain.

3 out of 4 economists predict a U.S. recession by 2021, survey finds

Millions of Americans pay a payroll tax on their earnings, a 6.2 percent levy that is used to finance Social Security programs. The payroll tax was last cut in 2011 and 2012, to 4.2 percent, during the Obama administration as a way to encourage more consumer spending during the most recent economic downturn. But the cut was allowed to reset back up to 6.2 percent in 2013.

White House adviser Kellyanne Conway downplayed economic indicators signaling a possible future recession on Aug. 19. (Video: Reuters)

Workers pay payroll taxes on income up to $132,900, so cutting the tax has remained a popular idea for many lawmakers, especially Democrats seeking to deliver savings for middle-income earners and not the wealthiest Americans. But payroll tax cuts can also add dramatically to the deficit and — depending on how they are designed — pull billions of dollars away from Social Security.

The payroll tax cuts during the Obama administration reduced taxes by more than $100 billion each year, but the administration directed revenue to Social Security programs so those initiatives did not lose money. The cuts added to the deficit, however.

If Washington implemented a similarly sized reduction, the tax cut could equate to a bigger tax break for many families than the 2017 tax law.

The Trump administration’s discussions about whether to pursue a new payroll tax cut began in recent days, the three people said, and specific details about the design were not reached.

Trump and top aides have spent the past few days trying to convince the public that the economy is strong and that fears about a recession are misguided. But White House officials have begun scrambling for new ideas to reverse public concerns and boost business confidence.

Some administration officials have felt that planning for an economic downturn would send a negative perception to the public and make things worse, but Trump has spent much of the past week conferring with business executives and other confidants seeking input on what they are seeing in the economy.

There are signs the U.S. economy is slowing, and economists fear that Germany and Britain already are tipping toward a recession. So far, consumer spending has remained one of the U.S. economy’s bright spots, and White House officials are aware that Trump’s reelection chances could hinge on the economy staying strong into next year.

Payroll tax cuts have remained popular with Democrats largely because they are seen as targeting working Americans and the money is often immediately spent by consumers and not saved. That way, the money gives consumers more spending power but also helps businesses that rely on the income.

The White House talks are at such an early stage that aides have not begun consulting with key lawmakers yet.

A spokesman for Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) said that the lawmaker had not discussed a payroll tax cut with the White House and that “at this point, recession seems to be more of a political wish by Democrats than an economic reality.”

Democrats, meanwhile, have become skeptical about the White House’s propensity to swing from one idea to the next, particularly when it comes to the trade war in recent weeks.

“Their panicking and flailing is palpable and adding more uncertainly to the economy and making a possible Trump recession more likely,” said Rep. Bill Pascrell Jr. (D-N.J.). “They’re flying by the seat of their pants and don’t seem to have any real plan. So let’s see the fine print first.”

White House officials have become acutely focused on protecting strong levels of consumer spending, which is one reason they are eyeing new tax cuts. That is because one of the biggest causes of economic downturns is a pullback in consumer spending. That hurts businesses, which then lay off workers, who then cut back on spending — a painful economic loop.

In the past, Democrats have strongly supported payroll tax cuts, while Republicans have been more resistant. Republicans have complained that such cuts do not help the economy and disproportionately worsen the deficit.

White House officials have shifted wildly in recent days, with varying assessments about the economy. Kudlow has sought to convey optimism, but Trump has been less consistent.

The president on Monday sought to play down the risk of a recession while also pinning the blame for a potential economic downturn on the Federal Reserve, chastising the central bank’s chairman, Jerome H. Powell, for a “horrendous lack of vision.”

In a tweet, Trump also called for the Fed to reduce interest rates by at least 100 basis points, marking an escalation of his demands on the central bank. Trump has frequently lashed out at Powell but had never used the phrase “basis points” in a tweet or made such a specific demand.

“Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to ‘will’ the Economy to be bad for purposes of the 2020 Election,” Trump tweeted. “Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world.”

He then declared that interest rates, “over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well.”

“If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!” he said.

The federal funds rate, which Trump is trying to persuade central bankers to cut, is set at 2.25 percent. Slashing it 100 basis points would lower this rate to 1.25 percent, giving them little additional wiggle room to maneuver if a full-fledged recession began.

Trump calls on Fed to cut rates by 100 basis points amid recession fears

The president’s plea to launch a new phase of “quantitative easing” is shorthand for asking the Fed to pump more money into the economy, a step that could weaken the U.S. dollar. This also is seen as an extreme step that central bankers take when they are trying to urgently address a slumping economy, not a tactic that is employed when the economy is still growing.

Fed officials have said they do not make decisions based on political pressure, but Trump has taken his attacks on the central bank to new extremes, particularly this month amid numerous signs that the U.S. economy is weakening more than expected.

After a tumultuous week in the markets suggested that the economy is heading onto shaky ground, Trump and his top officials have touted what they say are the economy’s strengths, particularly consumer spending, and predicted that a recession will not occur.

As concerns mount, Kudlow has scheduled briefing calls this week with state and local business leaders, conservative groups and others to gauge the economy’s strength and seek more input.

White House spokesman Judd Deere said the calls, which “have been long-planned,” will focus on Trump’s economic agenda, including issues such as deregulation and energy production.

But even as the White House has dismissed the notion that the country may be headed toward a recession, Trump has sent mixed messages.

In an exchange with reporters in Morristown, N.J., shortly before taking off for Washington on Sunday evening, Trump brushed aside the possibility of a downturn, saying, “I don’t see a recession.”

“I mean, the world is in a recession right now — although that’s too big a statement,” he added, in a remark that appeared to undercut his effort to calm fears.

Felicia Sonmez and Isaac Stanley-Becker contributed to this report.