VAT Could Reduce Retail Spending $2.5T

October 18, 2010

This article is included in these additional categories:

Financial Services | Government & Politics | Regulatory | Retail & E-Commerce | Staffing

A national Value-Added Tax (VAT) could bring a permanent drop in retail spending totaling $2.5 trillion during the first 10 years, according to a comprehensive new economic analysis conducted for the National Retail Federation (NRF) by Ernst and Young LLP and economic research firm Tax Policy Advisers.

Reduced Spending Predicted
“The Macroeconomic Effects of an Add-on Value Added Tax” forecasts that if a VAT (which essentially acts as a national sales tax on top of local/state sales taxes), were passed by Congress and begun in 2012, retail spending and services would substantially decline each year for 10 years, starting with a $257 billion decrease in 2012.

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Although the study predicts a curve in spending reductions which would reach a low of $213 billion in 2014, decreases would then start growing again, to $223 billion in 2015 and winding up at a 10-year high of $288 billion in 2021.

These losses would total more than $2.5 trillion in the first decade of a VAT, and the NRF predicts they would be permanent, reflecting about a 5% retail spending reduction after 10 years.

Losses in Jobs, GDP Also Seen
The study also forecasts that total US 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.

Furthermore, the study estimates GDP would initially drop 0.2%, would take four years to return to pre-enactment levels, and after 10 years would be up by only 0.3%.

$400B Cost to Taxpayers Predicted
Based on total personal consumption expenditures of $10 trillion in 2009, the study estimates a VAT would cost taxpayers close to $400 billion annually. The study said a VAT is inherently regressive, and that provisions to lessen the impact on the poor increase the burden on the middle-class. A family of four with an income of $70,000 would pay $2,400 in VAT taxes annually, a 100% increase from their current federal income tax payment.

Study Recommends Spending Cuts
As an alternative to the VAT as a source of deficit reduction, the study recommends instead cuts in government spending could reduce the deficit without the negative effects of a VAT. Study analysis concludes reducing government spending would bring only a 0.7% initial drop in retail spending, 250,000 jobs would be created rather than lost, and GDP would grow 0.1% in the first year and 0.7% in the 10th year.

2 in 3 Consumers Would Cut Spending in Response to VAT
Nearly two-thirds of those surveyed (64%) in an earlier study from the NRF and BIGresearch said a federal VAT of any amount would impact their overall spending. If the government imposed a VAT of 15% and applied it to all purchases, 92% of consumers said their spending would be affected. VAT proponents have not specified how it would affect existing federal income and local/state sales taxes.

About the Data: Calculations were based on modeling a “narrow-based” VAT with a rate of 10.3%, which would reduce the annual federal deficit by 2% of GDP. Similar to VATs in Europe, the narrow-based VAT would cover most consumer goods and services but home sales, rent, groceries, medicine, health care, financial services and education would be exempted to ease the regressive impact on low-income families.

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