The White House issued another warning to the members of the Congress regarding the negative effects of automatic tax increases and spending cuts scheduled to take effect by January next year. The White House projected that consumer spending could slow down during the rest of the holiday season, and it might decline by approximately $200 billion in 2013 if the Congress fails to resolve the problem.
Based on the report released by the White House Council of Economic Advisors, consumer spending will drop by 1.7 percent and the over-all economic growth will decline by 1.4 percent in 2013, if the tax rate for middle-income earners increases by $2,200. The growth rate of the United States is only a little more than 2 percent. The 1.4 percent cut will definitely halt the slow growth of the country’s economy. In addition, consumer spending is a major factor in driving the growth of the U.S. economy.
According to the report, the mandated automatic spending cuts and tax increases, also known as “sequestration,” could hit the economy by $500 billion, which would push the United States back to recession next year.
The White House said, "There is no reason to hold the middle class hostage while we debate tax cuts for the highest income earners."
During the kick-off of the holiday shopping starting on Thanksgiving Day until Sunday, The National Retailers Federation estimated that the sales of retailers jumped to $59.1 billion from $52.4 billion during the same period last year. The result showed that consumers’ confidence in the economy is becoming stronger as home prices and the number available jobs started to climb.
Despite the encouraging start of consumer spending, the White House warned "the hard-earned rise in consumer confidence will be at risk if the middle-class tax cuts are not soon extended with a minimum of political drama."
The White House report cited that the amount spent by Americans for new vehicles last year is equal to the impending $200 billion cut in consumer spending. The effect of the sequestration would be felt by companies across the board once the spending declined by $36 billion for housing and utilities, 32 billion less for healthcare, and $26 billion less for groceries and at restaurants.
Last Sunday, Republican Senator, Lindsay Graham indicated his willingness to compromise and allow the federal government to limit some tax deduction and close loop holes to generate additional tax revenue. He said, "Republicans should put revenue on the table. We're this far in debt. We don't generate enough revenue. Capping deductions will help generate revenue. Raising tax rates will hurt job creation.”
On the other hand, Senator Richard Durbin reiterated the position of the majority of the Democratic legislators to increase the tax rate for the wealthy. He said, "Let the rates go up to 39 [percent]. Let us also take a look at the deductions. Let's make sure that revenue is an integral part of deficit reduction.”