One novel tax change could improve consumer spending

September 22, 2011

Early signs of a slow holiday season could test the mettle of store operators for yet another year.

Barely a day passes without fresh evidence the economy is out of gas and in danger of rolling downhill without steering. A polarized Congress has failed to solve pressing problems of debt and unemployment, housing and investment values are shaky, fuel costs are high, and no help will be coming from abroad.  

The United States is on its own. And American households feel they’re on their own. None of this bodes well for the upcoming holiday season, as consumers look warily over their shoulders for the next negative news.  

Indeed, Kantar Retail forecasts flat unit volume in Q4 "at significant risk for turning negative by year-end or the start of 2012."  This could translate into a 2.8% rise in holiday season dollar sales, exactly half the growth rate posted a year ago.

And the quarter will be filled with bargain hunting. Mintel says 64% of U.S. moms spend more time finding sales, discounts and coupons compared with a year ago.

Why wouldn’t they? The U.S. Census Bureau counted 46.2 million Americans living in poverty in 2010. That's 15.1% of the population, up from 14.3% a year earlier, and the highest percentage in 52 years of tracking the figure. Median household income slipped to $49,455, down for the third consecutive year.

In New York City suburbs, for example, a Siena College Research Institute Poll taken this summer showed more conservative shopping has taken hold. For example, 78% of consumers use coupons and other discounts, 74% curtail impulse buys, and 50% substitute lower-quality goods to save money, according to a Newsday account. 

No wonder Walmart remains troubled. Newly released research from Blueocean Market Intelligence states most consumers feel the economy worsened in Q2 – and since they're pessimistic about the upcoming six months, "Most plan to maintain their lower spending levels (at Walmart and other retailers) into the holiday season."  Moreover, Walmart's Ad Match Guarantee makes some shoppers more confident they're getting the best deal, but others feel it erodes their price leadership. And Walmart isn't seen as improving on its convenience or pleasant store experience.

Meanwhile, Walmart CEO Mike Duke pushes for corporate tax reform to help brick-and-mortar stores compete.  

However, The Lempert Report sees a bigger-picture solution in the redistribution of the nation's wealth. Former U.S. Labor Secretary Robert Reich cited Moody's Analytics when he wrote in the New York Times this month that, "The five percent of Americans with the highest incomes now account for 37% of all consumer purchases."  His point: the middle class can't sustain spending without incurring debt.

To help remedy this, The Lempert Report proposes a change in the gift tax law. We'd like to see seniors be able to gift heavily to the next generations of young, growing families with children, without incurring taxes on these gifts. One condition: the recipients will need to prove they're spending the money. By placing money in the hands of families when they need it the most, spending will grow and retail sales will once again lift the GDP.