VAT’s Cost: 850,000 Jobs

NRF has said for quite a while that the European-style Value Added Tax being proposed by some Washington policymakers to reduce the federal deficit would be devastating for the economy. Now we have a study that proves it.

NRF recently commissioned Ernst & Young and Tax Policy Advisers to conduct an in-depth analysis of the economic impact of adding a VAT on top of the existing federal tax system. The results are in, and show that a VAT 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 of more than $200 billion a year – $2.5 trillion over the first 10 years alone. Most working Americans alive today would see a lower standard of living for many years to come, with everyday necessities costing more and the poor, middle class and elderly forced to make do with less.

The study used a “narrow-based” VAT with a rate of 10.3 percent, which would reduce the annual federal deficit by 2 percent of GDP. Similar to VATs in Europe, the narrow-based VAT would cover most consumer goods and services; home sales, rent, groceries, medicine, health care, financial services and education would be exempted in order to ease the regressive impact on low-income families.

Under those conditions, the VAT would cost taxpayers close to $400 billion a year. That means lower “real” wages, lower purchasing power and a lower standard of living. Middle-class families would bear the largest burden. Senior citizens would be hard hit because they consume a higher percentage of their income than younger people.

If not a VAT, then what? The study shows that if an equivalent amount of spending were cut by Congress, all the benefits of reducing the deficit could still be seen but with an increase in GDP, about one-seventh the drop in consumer spending and — best of all — the creation of 250,000 new jobs. Spending cuts would require hard choices, but these are hard times. Initiatives that help create jobs and thereby boost GDP would increase government coffers and be one way to make the choices a little easier.

This study is just the most recent example of NRF’s commitment to investing resources to deliver real value to our members and increase the visibility of retail as we make our industry’s advocacy footprint as large as its economic footprint. NRF has submitted the study to President Obama’s deficit reduction commission, and we hope they see what we see: A VAT would be part of the problem, not part of the solution, and would only prolong the economic downturn we have already experienced for far too long.