Higher taxes squeezing U.S. households, rich families most taxed in 34 years

The Commerce Department released data Friday that showed consumer spending was rather moderate in January and households across the United States were squeezed because of higher taxes. Although consumer spending was up by a timid 0.2 percent, the increase was due in part to utilities because of the frigid winter weather.

A paucity of spending, which accounts for more than two-thirds of the national economy, could last throughout the first half of the year as middle-class Americans deal with the expiration of the two percent payroll tax cut and the affluent cope with the highest tax rates in more than three decades.

When taking taxes into account, incomes declined to a record four percent in January. This comes one month after incomes accelerated 2.7 percent. Since consumers’ incomes plunged, they haven’t been spending nor paying their bills.

Another key factor of the published data is that savings rates fell to their lowest level since Nov. 2007. The savings rate, which is calculated by the percentage of disposable income put away for a rainy day, dropped to 2.4 percent. Akin to the income statistic, the savings rate had soared to 6.4 percent in the month of December.

During his two-day testimony to the Congress this week, Federal Reserve Chairman Ben Bernanke has claimed that the policy of low interest rates has assisted in the increase of consumer spending. However, this initiative could damage the future of the country as more Americans sacrifice the future for the present, which can be seen in the enormous consumer debt loads.

Tax bills for the wealthy

Despite President Barack Obama and the Democratic leadership demanding the rich to pay their fair share, wealthy families are paying the largest federal tax bills in approximately 34 years, a time when President Jimmy Carter was in office.

New analysis by the Tax Policy Center (TPC), a Washington, D.C.-based research organization, suggests that American families generating incomes in the top 20 percent will pay on average 27.2 percent of their income in federal taxes (excluding state and local taxes). The top one percent – families earning $1.4 million each year – will dole out on average 35.5 percent of their income in federal taxes.

“My sense is that high-income people feel abused by being targeted always for more taxes,” said Roberton Williams, a fellow at the Tax Policy Center, in an interview with the Associated Press. “You can understand why they feel that way.”

The report also showed that the middle 20 percent of U.S. households will pay out on average 13.8 percent of their income in federal taxes this year. For more than three decades, the average tax rate for the middle class has been 16 percent.

The bottom 20 percent will not be paying any federal taxes at all and will actually be receiving more in payments from the federal government than they owe in taxes. This means millions of Americans will be under a negative tax rate.

Even with higher tax rates among the nation’s wealthiest, the president has warned that the federal government needs additional tax revenue in order to reduce the budget deficit and government borrowing.

“I am prepared to do hard things and to push my Democratic friends to do hard things,” Obama said Friday. “But what I can’t do is ask middle-class families, ask seniors, ask students to bear the entire burden of deficit reduction when we know we’ve got a bunch of tax loopholes that are benefiting the well-off and the well-connected, aren’t contributing to growth, aren’t contributing to our economy. It’s not fair. It’s not right.”

However, many conservatives are arguing that tax hikes are the last thing the country needs right now, especially considering the latest Commerce data. An increase in taxes would lead to a lack of savings and investment, reduced consumer spending and hurt long-term economic growth.

“Raising taxes hurts the economy, and raising taxes on upper-income individuals — whether those who work for salaries or those who save and earn capital income — always hurts the economy the most,” said J.D. Foster, a fellow at the conservative Heritage Foundation, in an interview with the news outlet “Spite and envy are not sound bases for public policy.”

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