Consumer Spending Increases

Despite the expiration of the payroll tax cut and the increase on Social Security taxes that began on the start of the new year, The New York Times reports that consumer spending rose by about 0.2% in March. According to the federal government, the increase that took place between January and March marks the fastest increase in consumer spending for over two years. This increase is partially due to the fact that March was unusually cold, leading American’s to spend more for heating. Thus it is important to note that although an increase in consumer spending is typically good, an increase which is the result of spending more on utilities does not necessarily indicate higher consumer confidence. Spending on other things, such as clothes, cars, household goods, and furniture would be more indicate of this. However, there is some room for optimism. The Commerce Department claims that the economy grew by 2.5% during the January-March quarter. This was 6 times higher than the rate recorded for the fourth quarter. Although this grow rate would be considered optimal in an economy with low unemployment, during a struggling economy this growth rate is not high enough to diminish unemployment.

Although taxes have increased, many believe this uptick in consumer spending could continue since American’s have reduced their personal debt, their home values have likely risen, and their stocks enjoyed some success further adding to their household wealth.

Since the recession officially ended in June 2009, growth has been weaker than usual after a severe downturn. The economy expanded just 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012.

Consumer Sentiment, Job Creation Could Suffer if Congress Fails to Reach a Deal

According to a White House report cited in the WashingtonPost, if Congress fails to reach a deal that would renew for the Bush-era tax cuts for middle class Americans, the economy may suffer. Among other consequences, consumer spending could plunge by $200 billion dollars, since middle-class Americans may become reluctant to spend if they are forced to pay $2,200 more in taxes. Consumer sentiment could also take a hit. Although 2007 marked the highest level in consumer sentiment, it declined rapidly in the summer of 2011 during the negotiations over the debt ceiling. Consumer sentiment has recovered since then and currently, it stands at its highest level in over 5 years. However, the Council of Economic Advisers warns that the fear of the “fiscal cliff” could drive down consumer sentiment and consumer spending. The Congressional Budget Office (CBO) also seems to concur with some of the findings of the Council of Economic Advisers, mainly that an extension of middle-class tax cuts could provide a much-needed boost to the economy. The CBO estimates that such an extension would result in a 1.3% increase in GDP and could help add up to 1.6 million jobs. Currently, it appears that negotiations are at a standstill. Although in recent days some top Republicans said they were willing to break Norquist's anti-tax pledge, Republicans and Democrats have not reached a deal to avoid the major spending cuts and tax increases that are set to take effect in 2013.

And the Winner for Highest Tax Rate Goes to…

Despite the lively debate surrounding our current tax code, the tax rate on incomes of $100,000 in the United States is quite low compared to countries in Europe and Asia. While Denmark may take the prize for the highest tax rate for incomes of $100,000, it only taxes 0.2% for social-security contributions. Taking into account all of these factors, Belgium actually gets the most out of its $100,000 earners, taking a cut of about 48%.  Also, as the Economist explains, despite the fact that tax rates for personal income were on the decline between 2003 and 2009, many governments have raised taxes in an effort to combat serious deficits.

How Low are American Taxes?

Following up on our post from Sunday, we find another post in the New York Times Economix blog, this time from Reagan and Bush administration official (and born-again Keynesian) Bruce Bartlett, who presents information supporting the argument that the United States is a low-tax nation. Federal tax collections as a percentage of GDP are to be 14.8% this year, the lowest level in more than sixty years. They were 14.9% in 2009 and 2010. Since the end of World War II, tax collections have averaged 18.5% of GDP.

Low taxes are especially beneficial to corporations. As has been widely discussed, statutory corporate tax rates in the Untied States are among the highest in the industrialized world, but they are also riddled with loopholes. As a result, the amount of corporate taxes actually paid is quite low. At 1.3% of GDP, corporate taxes are just one-third of what they were fifty to sixty years ago and about one-third of the OECD average (see chart above).

There can be little doubt that the United States is, by the standards of its own history and its international peers, a low-tax (and low-government-service) nation. But, does Bartlett overstate the case? Perhaps. He only focuses on federal taxes. All nations collect taxes at the sub-national level as well. American state and local taxes account for approximately another 10% of GDP, above the OECD average for sub-national taxes (see the chart below - where (l) means local and (s) means state, regional or provincial taxes). Even taking state and federal taxes together, American taxes are still quite low compared to other wealthy countries, but the issue is a bit more complicated than Bartlett suggests.



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