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Consumers to spend less if middle-class taxes rise: White House

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U.S. President Barack Obama speaks about the need for Congress to extend tax cuts for middle class families at the White House in Washington
U.S. President Barack Obama speaks about the need for Congress to extend tax cuts for middle class families at the White House in Washington

By Jeff Mason

WASHINGTON (Reuters) - A White House report says that if that Congress allows taxes to go up on middle-class families, consumers will spend $200 billion less in 2013.

The report by the White House's National Economic Council and Council of Economic Advisers, released on Monday, was the latest salvo by President Barack Obama to encourage lawmakers to extend tax cuts for families making less than $250,000 a year and fix a tax aimed at making sure wealthy people pay a minimum amount.

The newly re-elected Democratic president is negotiating with Republicans in Congress over the "fiscal cliff" - a combination of tax increases and spending cuts that would go into effect next year if the two sides do not reach a deal to stop it.

While the White House and Republican leaders wrangle over raising taxes on the wealthy - a key campaign promise of the president's - Obama would like Congress to pass measures now to lock in lower tax rates for the middle class, the primary constituency he courted in his re-election campaign.

"The president has called on Congress to act now on extending all income tax cuts for 98 percent of American families and not to hold the middle-class and our economy hostage over a disagreement on tax cuts for households with incomes over $250,000 per year," the report said. "The Senate has passed this bill and the president is ready to sign it."

The White House also wants lawmakers to fix the alternative minimum tax, which was set up decades ago so that wealthy Americans could not avoid taxes using legal tax breaks and loopholes. The AMT was not indexed for inflation and has to be updated or "patched" every year to avoid sweeping in millions of less affluent taxpayers.

"Allowing the middle-class tax rates to rise and failing to patch the Alternative Minimum Tax could cut the growth of real consumer spending by 1.7 percentage points in 2013," the report said.

"This sharp rise in middle-class taxes and the resulting decline in consumption could slow the growth of real GDP by 1.4 percentage points, which is consistent with recently published estimates from the Congressional Budget Office."

The CEA estimated that consumers would spend nearly $200 billion less next year as a result of higher taxes. The drop would hurt the retail industry, which has accounted for nine percent of employment growth since the U.S. recession ended in June 2009, the report said.

(Editing by Fred Barbash and Jackie Frank)

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