Effects of Tax cuts on holiday shopping

Posted: October 17th, 2013

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Effects of Tax cuts on holiday shopping

Holiday shopping in 2012 was commenced with a resounding start especially during the thanksgiving weekend with black Friday reporting tremendous sales. The huge sales were not limited to the day itself, but also a few days prior to black Friday with a number of stores offering store discounts. This could all soon end with congress threatening to increase taxes for middle income families. If pushed through, this will destroy the US economy. A report released by the White House stated that in order to prevent a decline in the high level of holiday shopping going on, the US would need to continue the tax cuts bestowed on middle income families to the end of the year.

A fall in the economy would have two effects. Primarily, it would affect numerous industries in the country simultaneously. In addition, it would diminish consumers’ confidence in the financial markets. If implemented, the tax cuts could see the decrease of the growth of the GDP by up to 1.4%, which would be a win, whichever way one looks at it. The definition of middle class provided is those households that earn about 200 000 dollars per year or 250000 dollars per year where one is married. Typically, sales during the holiday season account for about a quarter of sales in every industry. Any increase in taxes would immediately reduce the rate of supply and demand which would then reduce consumption dramatically and result in a much more sluggish revival of the economy (Pindyck, 24).

Critics of the proposed tax hike cite several shortcoming in the presidents plan such as a much more sluggish growth in the economy with the rate of inflation going up and the GDP falling lower than ever (Perloff, 37). The tax hike would also affect the ob creation process with fewer and fewer jobs created every year, which would consequently lead to more and more people facing unemployment. Other key economic areas would also be affected such as there is the danger that investments in business would be likely to fall consistently every year. Investment in houses would also suffer the same fate. In addition, the amount that people had saved up would also decrease as disposable income available in a household fell.  Any hike in taxes would immediately result in a reduction in consumption (Perloff, 96)

The reason for the proposed tax hikes would be to raise money to fill the deficit in the budget. This is in spite of all the evidence that states that the reason there is a deficit is due to government spending rather than due to lack of fresh revenue. To avoid these possible outcomes, the government would need to reduce on spending (Pindyck 22). However, the view of congress is that the best course of action would be the acquisition of new revenue rather than the reduction of spending to raise the deficit amount in the budget.

What is most shocking about the situation is that even though the tax hike is proposed for only middle-income families, this might not always be the case. The taxes of people whose income is lower might also be included at some time in the future. With the Obama health care plan for instance, the promise was to provide free healthcare without an undue increase in taxes, however, with the realities of such an ambitious plan setting in it was concluded that others would have to be included in the taxing system other than the top 3% of businesses as promised.

Reference

Perloff, Jeffrey M. Microeconomics. Boston: Pearson Addison Wesley, 2004. Print.

Pindyck, Robert S, and Daniel L. Rubinfeld. Microeconomics. Upper Saddle River, N.J: Pearson Prentice Hall, 2005. Print.