White House: Failure To Extend Middle Class Tax Cuts Would Crush Economic Growth

The end-of-year package of tax increases and spending cuts brought about by last summer’s debt ceiling deal includes the expiration of multiple tax breaks that benefit the middle class, and allowing those provisions to expire would have damaging effects on consumer spending and the overall economy, according to a report from the White House’s Council of Economic Advisers (CEA) released this morning.

Failure to extend the middle class portion of the Bush tax cuts, along with the failure to patch the Alternative Minimum Tax (AMT), could reduce overall economic growth by 1.4 percentage points and reduce consumer spending by $200 billion in 2013, the report found:

Taking account of these multiple channels, the President’s Council of Economic Advisers (CEA) estimates that allowing middle-class tax rates to rise and failing to patch the AMT 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 similar to recently published estimates from the Congressional Budget Office.

To put these figures in perspective, faced with these tax hikes, the CEA estimates that consumers would likely 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 larger than the total amount that 226 million shoppers spent on Black Friday weekend last year, or roughly the amount American families spent on all the new cars and trucks sold in the U.S. in the last year. As Figure 5 shows, this $200 billion reduction would likely be spread across all areas of consumer spending.

Reports from the nonpartisan Congressional Budget Office and Congressional Research Service have backed up findings that allowing the expiration of the tax cuts that benefit middle class families would have perilous effects for the nation’s economy. President Obama has proposed an extension of the Bush tax cuts for incomes below $250,000 while allowing for the expiration of lower rates on incomes above that threshold. Both the CBO and CRS found that the expiration of tax cuts above $250,000 would have little effect on economic growth.

The report also takes into account certain tax credits, such as the Child Tax Credit, that will expire at the end of the year. Senate Democrats attempted to extend the middle-income Bush tax cuts as well as those tax credits earlier this year, but Republicans blocked the bill and chose instead to support legislation that would raise taxes on 10 times as many Americans as the Democratic plan.