What would you give up to cover your tax increase?

Jill Beccaris-Pescatore picture

The White House says a "typical" family of four would see a tax increase of about $2,200 if the country falls over the fiscal cliff.

So what, exactly, would you do if you lost more than two grand in income over the course of a year?

The Obama administration took to Twitter recently to gather opinions on this issue, though the White House needs to clarify the question.

Under the hash tag #My2K, the administration asked Americans what a $2,000 tax hike would mean to them.

Here are a couple of the Tweets:

@MellissaFye — “If my taxes go up by $2000, I will default on my student loans, give up my car, and move back with my parents with my husband. #My2k”

@lisabella964 — “We are two public school teachers trying to put two boys through college. It’s already difficult, don’t make it harder.”

What the White House should have asked is, "What opportunity cost will you incur if you have to pay an additional $2,000 in taxes?"

In other words, what will you sacrifice in order to make room for the change in income?

The question addresses our spending priorities. And isn't that what this budget debate is all about?

Taxes by the numbers

Tax Now Post cliff
Social Security 4.2% 6.2%
Income 25%, 28%, 33% and 35% 28%, 31%, 36% and 39.6%
Capital gains Up to 15% Up to 23.8%
Dividends Up to 15% Up to 43.4%
Read more about the fiscal cliff tax hikes here.

What do we see is important in our own budget?

This is an exercise of walking in the shoes of Congress and President Obama.

What should Congress and President Obama sacrifice to close the budget deficit and pay down debt? Social programs? Lower tax rates? Close loopholes?

I decided to ask the question to my Twitter followers, my college students and colleagues. The results surprised me.

They were not as catastrophic as those with the #My2k hashtag.

Here's a sampling:

— “Cut out eating out, frivolous shopping, home improvements.”
— “Stop taking guitar lessons and going to the movies in order to pay my tuition.”
— “Go to the nail and hair salon less, do it myself instead.”
— “Work more to make my car payments and pay for gas and food.”
— “Try to save more, pay myself savings first.”

The results showed the opportunity cost of rent and car payments are things like movies and eating out.

The pattern worth noting was that many people said they wouldn't really notice the increase and would adjust accordingly. This was true across demographics.

Not notice, how can it be?

Incremental changes cause us to change habits in a subtle way, but this adds up to a broad reduction in spending.

The bigger picture is that consumption falls due to increased taxes on the middle class. A reduction in aggregate demand and GDP will follow.

The service sector takes a big hit, and an area of strong job creation in this tepid recovery becomes the victim.

And let's be clear, the service sector is a huge part of the economy, representing at least three-quarters of the labor force.

When posed the $2K question, middle-class Americans unintentionally choose to eliminate their own jobs.

Forced to make tough choices because our lawmakers can't compromise over a fiscal cliff that they created.

This is a choice Americans should not have to make.

Jill Beccaris-Pescatore is an assistant professor of economics at Montgomery County Community College in Blue Bell, Pa.

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