The White House warned Monday that American consumers will spend $200 billion less in 2013 if the looming fiscal cliff is not averted and automatic tax hikes are triggered across the board.
The fresh warning came as US lawmakers return to work after the week-long Thanksgiving holiday with time running out to strike an ever-elusive budget deal that will require painful compromises from Republicans and Democrats.
Several leading Republicans have indicated a willingness in recent days to accept a deal that includes more revenue from ending tax loopholes in return for significant funding cuts in social welfare programs beloved by Democrats.
If no deal is reached before the end of the year, a poison pill of tax hikes and massive spending cuts, including slashes to the military, comes into effect with potentially catastrophic effects for the fragile US economy.
Independent economists predict the overall economy would take a hit of more than $500 billion, probably sending the country tumbling back into recession.
The White House on Monday added more gloom to the doomsday scenario, highlighting the devastating impact that plunging off the fiscal cliff would have on consumer spending through the holiday season and into next year.
“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,” spokesman Jay Carney said.
“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,” he warned.
Accompanying his statement was a report by Obama’s Council of Economic Advisers that estimated US consumers could spend almost $200 billion less than they otherwise would in 2013 just because of higher taxes.
The fiscal cliff is the result of legislation designed to force action to rein in the runaway government budget deficit and make a dent in America’s ballooning $16.3 trillion public debt.
It has two main parts.
One would see tax cuts introduced by former president George W. Bush that lowered marginal rates for nearly all US taxpayers expire on January 1.
The other would force significant cuts to programs like Social Security, which provides government funds to the elderly, the disabled, widows and the poor, and Medicare, which covers health insurance for the elderly.
It would also see cuts to military spending, anathema to most Republicans, and other government programs.
Obama says any deal he concludes would have to include an increase in taxes on wealthy taxpayers, something congressional Republicans so far have rejected.
The plan he proposes — and presented to voters on the campaign trail — would raise the tax rate for top earners, but keep Bush-era tax rates for individuals who make less than $200,000 per year and families earning less than $250,000.
Republicans insist raising taxes on the wealthy would be counter-productive and only serve to slow economic growth and ensure that the country continues to be plagued by economic stagnation.
They insist that higher taxes would dampen spending and hiring and investment by business owners.
The top income tax rate, which now stands at 35 percent, will automatically revert to 39.6 percent at the beginning of 2013 unless there is a new budget deal.
Republicans prefer to look at ways to bring in more tax revenue by completely overhauling the old and unwieldy US tax code, including closing “special interest loopholes” likely to hit others as well as the rich.
In an encouraging sign that Republican intransigence on tax could be easing, a string of leading party figures have in recent days renounced a longstanding pledge never to raise taxes.
Obama has made Treasury Secretary Timothy Geithner his lead White House negotiator in the budget talks, a source close to the matter said.
No timetable has been announced but efforts to forge a deal are expected to intensify this week with the Senate returning to work on Monday and the House on Tuesday.
Obama, in conjunction with leading Democratic lawmakers, and Republican House Speaker John Boehner are expected to have the final say on any deal.