Fiscal Cliff 2013: Fiscal Cliff Negotiations Will Destroy Holiday Retail Sales

After a record-breaking post Thanksgiving Day spending spree, the Obama administration released a prediction that consumer confidence would take a significant hit if a deal over fiscal cliff was not reached. The White House announcement carried with it the further projection retail sales would be substantially negatively impacted. The NRF, along with CEOs of major retailers like Walmart (WMT, Fortune 500), Costco (COST, Fortune 500), and Macy's (M, Fortune 500), are among the influential groups urging lawmakers to act now to avoid the fiscal cliff.

"Our customers are working hard to adapt to the 'new normal,' but their confidence is still very fragile," Walmart CEO Mike Duke said in a statement after meeting with Obama two weeks ago. "They are shopping for Christmas now and they don't need uncertainty over a tax increase."

The White House noted consumer confidence, currently at a five-year high, was at risk: "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."

It is encouraging that the Obama administration is worried about what it calls a typical middle-class family of four facing a potential $2,000 increase in their total tax obligations between personal income and FICA contributions. But the majority of that tax increase will come from the end of the payroll tax holiday, something neither party seems to be willing to extend.

Most economists agree that even if President Obama gets what he wants on the Bush tax cuts, the end of the payroll tax holiday in January will lower take-home pay. As an example, the family making about $50,000 a year will pay another $1,000 in payroll taxes next year. If consumers don't realize that now, they certainly will when they receive their first pay checks in 2013, said Ellen Zentner, senior U.S. economist for Nomura.

Whether the White House or the Retail Association wish to admit it, consumers are spending and spending at record levels for multiple reasons.

Retail sales figures unadjusted for inflation hit a record high of $59 billion. That total was basically 13% higher than last year, according to a survey from the National Retail Federation. 140 million shoppers visited stores nationwide or shopped online between Thanksgiving through Sunday, up 6.4% from last year.

With unemployment down, household debt down, inflation tame and stabilizing to rising home prices, for now America is in the holiday spirit. Yet does the White House have reason to be concerned over future consumer demand, and the potential negative effect on the retail sector should personal income taxes rise? Probably not.

The White House is famous for its folksy stance on economic theory. The president repeatedly noted on the campaign trail his talking point references concerning taxes or the deficit or entitlement problems as not complicated, just simple math.

On this point, I must agree with the White House. The simple math dictates that should the payroll tax holiday not be extended, all Americans will see a reduction in their tax home pay eligible for FiCA with-holdings increase. For the much noted typical family of four, losing $1,000 (basically $83 per month) in disposable income will potentially slow retail spending. That is, of course, assuming that typical family of four does not see any increase in their wages during the year. The fact that consumer debt has decreased since 2009, partially a function of a historic high in refinancing, must also be considered.

As for the effects of a personal income tax increase should the Clinton tax rates return as the law of the land, the Obama administration’s simple math is simply incorrect.

The income tax you pay is not based on your gross income. It is based on your gross adjusted income after exclusions and deductions. Our typical family of four isn’t going to pay taxes on their gross of $50,000. At worst, they would pay tax on an adjusted gross income of less than $40,000 using a standard deduction of $11,900. What that nets in simple math is an annual personal income tax increase of 5% on their income between $0 -$8,750, or $435!

Now that you know the facts concerning the “simple math” concerning the pending fiscal cliff and its effect on your 2013 take home pay, I hope you will consider sharing whatever Christmas cheer you can with friends and family.