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November 26, 2012

White House Report on Threats to Consumer Spending from Middle Class Tax Hikes Leaves Out Payroll Tax Cut

Posted in: Uncategorized

The White House is getting more vocal on pressuring Republicans to extend tax cuts on the first $250,000 of income. They supplement this today with a new report from the NEC and the CEA, showing the impact of tax rises on the middle class on consumer spending, which comprises about 70% of the economy. It makes decent enough points. Tax-side austerity for the middle class, scheduled at an increase of about $2,200 annually for an average family of four, would cut the growth of real consumer spending by 1.7% in 2013, slow GDP growth by 1.4%, and reduce consumer spending in dollars by $200 billion, according to the report. That reduction equals four times the amount of money spent during Black Friday.

Considering that consumer sentiment spiked over the fall and now sits at a high level, tax-side austerity would have a near-term impact, though I think it may lead to a credit bubble in the medium term, and it could be easily offset with higher wages in a tighter job market that’s friendlier to labor. We shouldn’t necessarily be afraid of broad tax increases, but at this point in time, the near-term impact is undeniable.

The problem is that the White House report leaves out one of the most critical scheduled tax increases, the expiration of the payroll tax cut. This is the one that most reflects a wage subsidy, and the overall effect will cut wages by 2% on the first $110,000 of income. That means that the working poor and middle class will feel the tax increase much more acutely than millionaire wage earners who will tend not to notice. (For someone earning $1 million a year in salary, the expiration means a 0.2% effective wage cut, as oppose to the 2% cut for someone making $110,000 and under).

The explanation of the President’s plan to avoid this tax hike and crash in consumer spending leaves out the expiration of the payroll tax cut.

Under the President’s proposal, the 98 percent of American families with incomes of less than $250,000 per year would continue to benefit in full from the income tax cuts expiring at the end of 2012, including:

• The doubling of the Child Tax Credit to $1,000 per child, and the extension of the credit to millions of
working families that previously could not benefit from it.

• The 10 percent tax bracket, which will provide middle-class couples with a tax cut of up to $890 next year.

• Marriage penalty relief, which reduces or eliminates marriage penalties for nearly 38 million couples.

• Lower tax rates on up to $250,000 of income ($200,000 for single filers).

• Under the President’s plan, the income tax rates for high-income households would return to what they were under President Clinton, when the economy created nearly 23 million new jobs, we went from deficit to surplus, and businesses and investors did very well.

But the payroll tax cut expiration would cancel out much of this relief. And if you wanted to know the White House’s position on it, the absence of it here speaks volumes.

So while the President and his economic team wants to avoid a 1.4% GDP drag in 2013 with their tax plan, they don’t have a problem with the 1% GDP drag that will result from the expiration of the payroll tax cut. Which would hit middle-class consumers the most, and affect their level of spending on consumer goods, i.e. the point of this report.


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