Tax increase could cause reduction of living standards, says study

Smaller or reduced paychecks are expected this year because of the implementation of the fiscal cliff. According to the Tax Policy Center, one in every three Americans will be paying more taxes based on the new tax system. The amount of increase in tax collection depends on the monthly income; as such, those earning less than $10,000 will have a tax increase of $68 while those in the $200,000 to $500,000 salary range will have to pay $2,711 in taxes alone. Could this setup affect the economy in the long run?

Impact of Tax Increase on Taxpayers

According to a study published in July of 2012, the main reason why the issue on tax increase is very significant is because it may bring the unemployment rate higher. Flow-through businesses like S Corporations, LLCs, Partnerships and Sole Proprietorships are also categorized under individual tax payers.

These flow-through businesses employ more or less 54% of the able population and they also happen to pay 44% of the federal taxes. Hence, if their contribution to the federal taxes increase, it is likely that they will have to lay off employees in order to keep their production costs from going over and ruining the business entirely.

If, in case, the number of workers are kept then there is a possibility of smaller paychecks as a cost-cutting measure. Of course, the company still has to have some revenue in order to continue its operations. Expansions would also be limited as there will not be enough capital and it will quite difficult to seek investors with the taxes so high.

Because of the smaller paychecks, then there would be weaker work effort and participation coming from the labor force. That would, in turn, result in substandard products or materials and/or businesses not meeting their goals.

In the long run, it is highly likely that business output would go down by 1.3%, employment would fall by 0.5%, investment and capital stock would go down by 2.4% and 1.4% and real after-tax wages would go by 1.8%.

A Closer Look at Employee’s Living Standards

If the system would be looked at carefully, it will be the employees who will suffer the most. This is because even if their revenue is less than $10,000, they would still experience a tax increase of about $68. Small as this may be, it can still affect you greatly. A decline in the living standards is likely to be experienced. If this happens, there will likely be an increase in loans to make up for the smaller paychecks. Banks may not have the funds to provide for this surge in loan applications so those who will not be granted funds will likely seek help elsewhere. Bad credit loans offered by online companies become the next best alternatives if such is the case.

With the save rate really low, you should be ecstatic because that means consumers are spending. Consumer activity makes up for about 70% of the economy but here’s the other side of the story. The low save rate could only mean that Americans no longer have the extra money to put in the bank. This means that they will have to spend every dime just to finance their lifestyles. So unless a radical change in lifestyle occurs, the save rate would really be low to none and the percentage of loans would really be high.

At present, the fiscal cliff is set to take effect on March, instead of January and that prolongs the discussion of whether it’s the best decision the administration could have with regard to the current economic condition. Economists say that if it is the solution that is most likely to bring long-term benefits then a thorough review of all its provisions need to be in place.