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3 tax solutions equal more in-pocket cash for consumers

If the adage that small businesses are the engine of the economy is true, then consumer confidence is the fuel. As the economy continues to struggle, no group has been more squeezed during the past four years than Americans simply trying to maintain a decent standard of living.

According to Gallup’s daily estimate, U.S. consumer spending in September was down 30 percent since January of 2008, when Gallup first began tracking the data. Add to it Arizona’s 8.3 percent unemployment rate and it’s clear that times are extremely tough for the average Arizonan.

Consumers aren’t just holding onto cash because they have less; they also see uncertainty ahead. They can see that if U.S. policymakers don’t change course, the economy will fall right off a so-called fiscal cliff.

Policymakers seeking to improve the American business climate and the economy at large, therefore, need to give consumers more confidence and the means to start spending again.

Before the end of 2012, Congress should work to enact the following three policies:

First, both parties need to stop treating middle class tax cuts as a political football. While Democrats and Republicans differ on the extension of the top tax rates, everyone agrees that a tax increase — or even a threat of a tax increase — on the middle class is bad economics. If both sides agree that voters should decide, then we should pass a temporary extension to the current tax rates as soon as possible and let the winning side work to construct long-term tax policy in early 2013.

Second, Congress must also work to stop the looming tax hike on dividend income. Dividends, which are part of nearly every retirement account and pension fund in the U.S., are currently taxed at 15 percent. Without action, the rate is set to more than double. Include the investment surcharge of 3.8 percent from Obamacare and the dividend tax rate will nearly triple on Jan. 1, taking a huge chunk out of retirement funds. For consumers using dividends and other investments to pay for large expenses — such as saving for a child’s college fund — increasing taxes at a time when the price of tuition, gas and groceries continues to rise is an added strain. Congress should extend the current rate on dividends this year in order to encourage consumers to save for the long-term or for major purchases.

Finally, Congress must work to reduce America’s exorbitant corporate tax rate. At first glance it seems counter-intuitive for Congress to lower business taxes when consumers are hurting, but the evidence is clear that America’s high burden on corporations hurts wages and jobs. In fact, according to Ernst & Young, the corporate tax rate burden on workers equates to between $100 billion – $200 billion in lost wages and benefits during the past decade. Additionally, the Heritage Foundation estimates that reducing America’s 35 percent corporate tax rate — the highest in the industrialized world — to the OECD average of 25 percent would give a family of four an additional $2,484 a year in after-tax income.

If Congress makes these three sensible solutions a priority, consumers will see more money in their pockets in 2013, leading to greater spending, more growth and increased job creation.

America’s economic engine has underperformed for too long. Unless Congress acts to solve “taxmagaddon,” America’s consumers could tumble over the fiscal cliff and take the American economy with them.

— Steve Pociask, president, American Consumer Institute

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