This New Fiscal Cliff Report Issues $200 Billion Warning

A fresh fiscal cliff report from the White House today (Monday) has predicted that falling off the cliff will deliver a damaging blow to U.S. consumer spending.

The report from the White House's National Economic Council and Council of Economic Advisers cautioned that consumers will rein in spending next year to the tune of some $200 billion should Congress let taxes increase for middle class American families come 2013.

"American consumers are the bedrock of our economy, driving more than two-thirds of the overall rise in real GDP over 13 consecutive quarters of economic recovery since the middle of 2009. And as we approach the holiday season, which accounts for close to one-fifth of industry sales, retailers can't afford the threat of tax increases on middle-class families," the report stressed.

The report is the latest ammo that U.S. President Barack Obama is using to sway lawmakers to go along with his plan to extend tax cuts for American families making less than $250,000 a year, while raising tax rates on the wealthiest 1%, which Republicans vehemently oppose.

"The president has called on Congress to act now on extending income tax cuts for 98% of American families and not hold the middle-class and our economy hostage over a disagreement on tax cuts for households over $250,000 per year. The Senate has passed this bill and the president is ready to sign it," the report read.

With the Dec. 31 fiscal cliff deadline quickly approaching, Democrats and Republicans continue to butt heads over tax issues, as well as government spending and entitlement expenditures. If the two sides don't come to some kind of deal and we fall over the fiscal cliff, a 2013 recession is likely.

[ppopup id="70925"]READ: The fiscal cliff isn’t the only looming event you need to prepare your money to handle.[/ppopup]

Fiscal Cliff Report Details Tax Hikes

Another sticking point in Congress' squabbles over the fiscal cliff is tweaking the alternative minimum tax (AMT).

The decades-old AMT was established to prevent affluent Americans from avoiding taxes by using legal tax breaks and loopholes. Not indexed for inflation, the AMT must be "patched" yearly to avoid affecting scores of less wealthy taxpayers.

"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," the report highlighted.

Also threatening to cut into middle-class Americans' pockets is the virtually certain expiration of the "payroll tax holiday," part of the Obama administration's 2009 stimulus bill. The $400 "Making Work Pay" tax credit was shunned by the GOP during the last-lame duck session, mostly because Republicans didn't want to give President Obama the credit for the tax break.

But as a concession, Republicans agreed on the payroll tax holiday. The premise of the payroll tax holiday was to goose the ailing economy by reducing the amount workers pay in Social Security taxes to 4.2% from 6.2%.

The impact of quietly letting the payroll tax holiday become extinct will be larger than the impact of letting all the Bush tax cuts expire, according to Josh Bivens and Andrew Fieldhouse of the Economic Policy Institute.

Letting the holiday end would trim 0.6% off GDP growth in 2013, actually annulling any benefits from QE3, Jan Hatzius, chief economist at Goldman Sachs, has warned.

For the average family of four, the tax cut is worth about $40 a paycheck for those paid bi-weekly.

Nomura Securities' Ellen Zenter wrote in a recent piece, "Consumers do not make a distinction between federal income and payroll taxes, so any settlement that excludes an extension of the payroll tax cut reduces optimism starting in early January. We contend that households may curb spending in anticipation of lower take-home pay before January, cutting into late holiday spending."

It looks like vigorous retail spending enjoyed over the extended Black Friday weekend will be short lived as consumers retreat in anticipation of fiscal cliff effects.

Related Articles and News: