Tax Increase in 2013 Not Good for the Recovering Economy: Analysts

Last updated on October 31, 2012

Tax increase in social security, obamacare, medicare and income tax in 2013 may spell trouble for the economy that is slowly recovering, analysts believe. Even if taxes on the rich are increased, it may lead to an increase in unemployment. Although it does not sound plausible, the logic behind it is simple.

If the rich are paying more taxes, they have less money to spend. That might mean a vacation cancelled, firing of an extra gardener or buying less items of luxury. Even though that may not affect their living standard much, it can mean losses for businesses and individuals. Less spending directly affects sales of businesses. If sales are lower, businesses may lay off some employees to cut down on costs.

Those who do not cut down spending may reduce investment. For example, a store owner may not buy new furniture for the store he had been planning to buy. That hurts the manufacturer of furniture and reduces sales. Along with the manufacturer, employees in that factory will also be affected by fewer sales.

This is the effect of rise in taxes that analysts believe will push the country off the fiscal cliff. Moreover, the psychological effect of the fiscal cliff is leading businesses to invest less. Businesses are saving cash and not spending to deal with the fiscal cliff. That creates problems for the economy in the present. It remains to be seen how rise in taxes will affect the economy.