A new White House report from the President’s Council of Economic Advisers predicts that allowing tax rates for the middle class to rise and failing to patch the alternative minimum tax would have a negative impact on consumer spending and retailers alike.
The report, which was released Monday, forecasts that allowing the middle-class tax rates to rise and failing to patch the Alternative Minimum Tax could cut the growth of real consumer spending by 1.7 percentage points in 2013. “This sharp rise in middle-class taxes and the resulting decline in consumption could slow the growth of real GDP by 1.4 percentage points, which is consistent with recently published estimates from the Congressional Budget Office,” said the report.
Faced with these tax hikes, the report estimates that consumers could spend nearly $200 billion less than they otherwise would have in 2013 because of higher taxes. This reduction of $200 billion is approximately four times the total amount that 226 million shoppers spent on Black Friday weekend last year. The $200 billion reduction would probably be spread across all areas of consumer spending.
The report cites the example of a married couple with two children who have income between about $50,000 and $85,000, and estimates they would see a $2,200 tax increase. There would be a tax increase of $1,000 because the Child Tax Credit will fall from $1,000 to $500 per child, a tax increase of $890 because of merging the 10 percent tax bracket into the 15 percent tax bracket, and a tax increase of $310 because of the expiration of marriage penalty relief that provides a larger standard deduction for married couples.
President Obama and congressional Democrats have proposed to extend all the income tax cuts that benefit families who make less than $250,000 per year. The President has called on Congress to act now on extending all income tax cuts for 98 percent of American families and not to hold the middle-class and our economy hostage over a disagreement on tax cuts for households with incomes over $250,000 per year. The Senate has passed this bill and the President said he is ready to sign it.
“We should not hold the middle-class hostage while we debate tax cuts for the wealthy,” Obama said earlier this month. “We should at least do what we agree on, and that's to keep middle-class taxes low. And I’ll bring everyone in to sign it right away so we can give folks some certainty before the holiday season.”
Congressional Republicans have so far resisted allowing tax rates to rise for both middle-class and upper-income taxpayers, although Democrats have insisted on the expiration of the Bush tax cuts for taxpayers earning over $250,000 a year. Negotiations are underway among staff members of both parties in Congress to decide what to do about the rising tax rates and the automatic spending cuts for both domestic and defense programs in order to avert a “fiscal cliff” that threatens to plunge the economy into recession next year.
A retail industry trade group expressed concern about the report. “Today’s report underscores enormous challenges that consumers and retailers will face if the White House and Congress are unable to work together to address these critical issues,” said Retail Industry Leaders Association president Sandy Kennedy in a statement. “The White House and Congress must work together to address the fiscal cliff. If they fail to do so, the strong opening to this year’s holiday shopping season will soon be a distant memory as consumers prepare for a massive tax increase.”