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."
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.
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?