NRF Warns Against Adding Value-Added Tax
A new study conducted by Ernst and Young and Tax Policy
Advisers for the National Retail Federation predicts that the imposition of
a European-style value-added tax (VAT) on top of the current income-based system
in the U.S. would have severe, negative consequences for the economy.
The study, The
Macroeconomic Effects of an Add-on Value Added Tax, predicts
that adding a VAT would cause a loss of 850,000 jobs in the first year, reduce
the nation’s gross domestic product for three years and result in a permanent
drop in retail spending totalling $2.5 trillion over the first 10 years.
"Supporters claim a VAT is the solution to the nation’s economic
ills, but nothing could be further from the truth," said Matthew Shary,
president and CEO of the NRF, in a statement. "Imposing a VAT means everyday
necessities would cost more, the poor, middle class and senior citizens would
be forced to make do with less, and hundreds of thousands of people who have
jobs today would find themselves out of work."
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The report suggests that
a reduction in federal spending would have more beneficial effects when it
comes to reducing the deficit and aiding the economy.
According to the study,
an add-on VAT would reduce retail spending by five percent in the first year
and eventually taper off to 3.7 percent after 10 years. Reducing government
spending, however, would only cause a 0.7 percent drop in retail sales.
The
study estimated that adding a VAT of 10.3 percent to the current system would
reduce the federal deficit by two percent of GDP on an annual basis. While
most goods would be covered by the tax, some including housing, groceries,
health care, financial services and education would be exempt.
The NRF said
an add-on VAT would cost taxpayers roughly $400 billion a year. A family of
four making $70,000 would pay $2,400 in VAT taxes annually, a 100 percent increase
over what they now pay in federal income tax, according to the statement.
Discussion Question: How likely do you think it is that a VAT will be added
to the current income tax system in the U.S.? Would a VAT work for the economy
and retailing if it replaced the current income-based system in the U.S. and
wasn’t placed on top of it?
It’s unlikely that a VAT will be implemented any time in the near future. It’s an idea worth more investigation and consideration. The survey by the NRF produced the results it wanted. But since there isn’t a clamor for the VAT inside the Beltway at this time, it seems like an odd time to conduct and release the study.
Adding VAT on top of an already FAT income tax structure would be harmful to job creation and new sales generation. And without federal spending being curtailed we would be in a colossal fiscal mess.
A VAT tax structure without a federal income tax would place the onus on consumers since consumption would determine the amount of total tax revenue. While that might be considered a fairer and more equitable tax system it would tend to place a heavier burden on the poor than the rich. That would modify who buys what and hurt sales initially. Eventually that would level out somewhat and sales would flow into a revised pattern of consumption just like it has in countries with VAT.
In our consumption-oriented country, a VAT without a federal income tax would probably not affect retailers greatly after the pubic got accustomed to it … providing federal spending was contained.
The problem: manufacturers and retailers want consumers to spend more and our politicians seem to want government to spend too much.
I am not going to win many friends with this one, but I designed the VAT tracking system for a Canadian retailer many years ago and did a lot of investigating into its merits. I am for it. The “leakage” is much less because it is a simple bookkeeping process. Because it is a “collection” rather than a payment for the businesses reporting it there is no incentive to understate the amount. And done correctly, it can have a huge impact on the complexity of income taxes.
The misleading thing about this study is that it seems to assume a simple overlay of VAT on top of the income tax. That over simplifies the challenge.
The difficult thing with our current tax system is that we have tried to use it to motivate “good behavior.” Thus we have tax deductions for home owners, church contributions, and adoptive parents. These are all great things and I understand the desire to encourage them but, to simplify the tax laws, instead of funding them through taxpayer deductions we should just allocate payments from the tax revenues.
As far as the VAT is concerned, since it is such a prevalent feature in other nations it becomes difficult to compare economies if the US is different. People love to complain about the income tax rates in the US, forgetting that most funding in other countries comes from their VAT. By implementing a VAT combined with a flat income tax that includes credits for low income workers we can remove the regressive impacts of the VAT and simplify income tax compliance for everyone.
The real challenge with all this is that it requires government representatives who can take a little time out from their politicking to govern. Representatives from both parties are going to have to sit down with members of the other(s) to accept compromises and address the issues.
Fat chance of that happening.
It’s unlikely that a VAT would ever happen in the USA. It goes against our basic principles. It would punish a lot of people. Most of us have smart CPAs that make sure we don’t pay too much tax. A VAT would make a lot of hard working, income producing people pay more in tax. Since these are the people that have the most influence in making the rules we go by, it’s unlikely it’s ever going to happen. It would, however, give the taxpayers a way of getting back some of the money being paid out to those on the public dole, because they would soon find themselves having to pay more for everything. I’d rather keep the current tax system in place.
Considering the Republicans look to gain significant seats in Congress, including candidates from the extreme no-tax Tea Party movement, I don’t see a new national sales tax happening anytime soon. Honestly, I doubt a Democratic-controlled Congress would pass this either; the US citizenry takes a different view of taxation than Europeans.
I live in DC, and there is ZERO interest in a VAT here. So while they are at it, NRF could also come out against full voting citizenship for animals, tax preferences for people with green eyes, and raising the drinking age to 35.
You get more of what you subsidize and less of what you tax. The real solution to our ills is to scrap the whole tax system and put in place a consumption tax, with all the appropriate safeguards for low income purchasers. This would finally corral those who hide income and those who operate under the radar in the substantial cash economy and make them taxpayers with the rest of us. Of course, that will never happen because it gives the power back to the people and away from the politicians and bureaucrats. The government has shown little success taking care of what they have been tasked to do so far, giving them more is ludicrous. The solution to the nation’s economic ills is to stop trying to spend our way to prosperity. It doesn’t work for us individually and it obviously doesn’t work for the government.
There are lots of reasons why I don’t love VAT, having lived with it as consumer and business owner for a lot of years, but the knee jerk reaction to it in the article really shocked me. Talk about hyperbole.
“Adding a VAT would cause a loss of 850,000 jobs in the first year, reduce the nation’s gross domestic product for three years and result in a permanent drop in retail spending totaling $2.5 trillion over the first 10 years…The NRF said an add-on VAT would cost taxpayers roughly $400 billion a year. A family of four making $70,000 would pay $2,400 in VAT taxes annually, a 100 percent increase over what they now pay in federal income tax, according to the statement.”
I’m not a big fan of the current ways of applying sales tax in the US. Not being resident any more, or totally familiar with it, it’s frustrating in the extreme to pick up something in a store and not be able to tell from the price tag exactly how much I’ll be paying. But these scare tactics are almost enough to make me change my mind about VAT completely.
My concern isn’t primarily for what happens immediately (though that is concerning). It’s about giving the politicians yet another lever to take our money. We need to be reducing the number of levers and increasing the transparency about what gets expropriated, not giving politicians another vehicle to take a little (and eventually a lot) more.
I’m with Bernice on this: the NRF’s strident–even hysterical –and self-serving “study” probably does more to promote a VAT than defeat it…after all, how hard is it to kill something that’s never been alive?But the problem isn’t so much what kind of tax(es) the U.S. has, it’s that people want things but don’t want to pay for them…that a family with an income of $70K (allegedly) pays only $1200 in FIT–and likely complains the whole way–says a lot…none of it good.
This isn’t likely to happen any time soon, for a number of reasons. We seem to have quickly devolved into a noisy society with group after group trying to out shout one another to make sure they get their way on their particular hot button issues, without doing much listening at all.
Meanwhile, many on the right are clamoring for reduced taxes AND deficit reduction, while continuing to spend more on defense and fund current entitlements. Reality check: it ain’t going to happen that way! (Let’s look at how upset seniors were this week when they got no increase in Social Security even though there is no inflation as an example of what happens when entitlements are cut or just not increased.)
A more likely scenario is the continuation of spending on the key programs of those in power; reduction in taxes when there is enough noise; and one really BIG crisis ahead when the national debt and deficit get too big to deal with properly.
If the Democrats control both the House of Representatives and Senate, a VAT tax has potential. If either house has Republican leadership the potential is nil. A VAT tax would extend the recession 5 years and result in 9% unemployment the same as in Europe.
For retailers they would still collect state sales tax on top of higher priced goods due to the VAT. It would be their job to send VAT money to the government which is additional paperwork and processing. Since the Federal government would not be sharing this income with states, the total taxation only goes up. Just like in states that had no income tax, only a sales tax for state income, more money just goes to the state to spend and less is available to consumers to spend at retail.