Creation of a European-style Value Added Tax being proposed by some Washington policymakers to reduce the federal deficit would result in the loss of 850,000 jobs in the first year, reduce gross domestic product for three years, and bring a permanent drop in retail spending totaling $2.5 trillion over the first 10 years, according to a comprehensive new economic analysis conducted for the National Retail Federation.
“Supporters claim a VAT is the solution to the nation's economic ills, but nothing could be further from the truth,” NRF President and CEO Matthew Shay said. “This study shows that 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. Clearly, a VAT would be part of the problem, not part of the solution.”
“This report has found that a VAT would have negative economic consequences for most working Americans alive today,” Shay said. “If Congress wants to reduce the deficit, the solution is to cut spending, not to create a new tax.”
NRF released The Macroeconomic Effects of an Add-on Value Added Tax, conducted by Ernst and Young LLP and economic research firm Tax Policy Advisers. While others have examined replacement of the current federal tax system, the study is the first macroeconomic analysis of adding a VAT on top of the existing tax system as currently being discussed in Washington. NRF will submit the study to President Obama's deficit reduction commission for consideration as the panel prepares recommendations for Congress.
“In the face of an economy that continues to struggle, immediate enactment of an add-on VAT would pose serious risks,” the 60-page report said. “The drop in retail spending, jobs and GDP under an add-on VAT has the potential to further weaken the economy in the near term rather than strengthen it. Other countries have reduced, not increased, their VATs in the face of the recent economic downturn. Reducing the deficit through lower government spending would have much more favorable economic effects – more jobs, higher GDP, and a less depressing effect on retail spending – in both the near term and in the longer term.”
The study found that cuts in government spending could reduce the deficit without the negative effects of a VAT.
According to the study, an add-on VAT – which would drive up consumer prices and correspondingly reduce real income – would reduce retail spending by 5 percent in the first year, or $257 billion. The number would taper off to 3.7 percent after 10 years, but the loss would be permanent, and would amount to $2.5 trillion over the next decade. By contrast, reducing government spending would bring only a 0.7 percent initial drop in retail spending.
Total employment – including all industries, not just retail – would drop by 850,000 jobs in the first year under an add-on VAT and would remain down by 700,000 jobs for decades to come, the study found. GDP would initially drop 0.2 percent, would take four years to return to pre-enactment levels, and after 10 years would be up by only 0.3 percent. Under reduced government spending, 250,000 jobs would be created rather than lost, while GDP would grow 0.1 percent in the first year and 0.7 percent in the 10th year.
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