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Tax, consumer spending connection

By Kay Bell · Bankrate.com
Tuesday, November 27, 2012
Posted: 3 pm ET

President Barack Obama and Republican members of Congress agree on one thing: Tax hikes would hurt consumer spending.

But the opposing sides differ on just who would be hurt the most by any tax increases that might take effect next year, either through an agreement to keep the country from falling off the "fiscal cliff" or by the consequences of going over the edge and letting the low Bush-era tax rates expire.

The GOP is holding firm to its position that higher tax rates on the wealthy would be a job-killer.

The White House, meanwhile, has released a report that says higher tax rates on the middle class are the bigger economic scourge.

The report by the President's Council of Economic Advisers predicts that if tax rates on the middle class go up and Congress doesn't patch the alternative minimum tax, the resulting decline in consumption could slow real gross domestic product growth by 1.4 percentage points.

The alternative minimum tax, or AMT, is a parallel tax system created 43 years ago to ensure that the wealthiest individuals paid at least some tax. But because the tax is not indexed for inflation, it affects more middle-class taxpayers each year unless Congress accounts for that fiscal oversight by patching it -- that is, hiking the amount of earnings that are exempt from the alternative tax.

Higher tax bills created by the combination of AMT liability and higher rates would cause consumers to spend nearly $200 billion less than they otherwise would in 2013, according to the White House document's estimates. That lost income for retailers probably would be spread across all areas of the economy.

The report offered an example:

A married couple with two children and an income between about $50,000 and $85,000 would see an estimated $2,200 tax increase. Part of the added tax bill would come from losing $500 of the child tax credit's value. The popular credit currently is $1,000 but will be cut in half without legislative action.  The couple would pay another $890 more because of the loss of the 10 percent tax bracket, which would fold into the 15 percent tax bracket. And the return of the marriage penalty, which through 2012 is reduced by wider tax brackets and a larger standard deduction for married couples, would also cost the couple tax money.

The report also took the opportunity to reiterate Obama's consistent campaign for higher tax rates on families making more than $250,000 a year. "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."

While not endorsing either side in the "fiscal cliff" fight, two retail industry trade groups cited the White House report in calls for fiscal cliff compromise. The retailers' pleas follow a pre-election call by CEOs for a quick deal on the impending economic catastrophe.

"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 Sandy Kennedy, president of the Retail Industry Leaders Association, 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."

Similar sentiments came from the National Retail Federation.

"It is encouraging to see the Administration's acknowledgement that retailers and their customers will be among the hardest hit if our elected officials fail to address ongoing economic uncertainty," said Mathew Shay, the federation's president and CEO. "If brinkmanship overtakes bipartisanship, we will continue to see less capital investment by retailers large and small, stifled job creation, and dampened consumer confidence, which will ultimately lead to lower retail sales and potentially another recession. The time for talk is over, and the time for action is now."

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2 Comments
shar
November 29, 2012 at 7:27 pm

The scariest tax is the estate tax. It will cause a lot of family farms and small businesses that are not corporations to be sold.

Nadine Nelson
November 27, 2012 at 3:39 pm

Greetings:

Question not Comment... The proposed tax increases on capital gains and dividends for stocks I understand are for those with incomes of 250K or more. I understand things change but is this the current proposal?