“This tax would apply to everyday necessities and drive up costs for working families on everything from food to homes to health care,” Shay said. “While the poorest of the poor might receive some type of rebate, the middle-class would bear the greatest burden and senior citizens living on a fixed income would be forced to make do with less.”
NRF this year commissioned Ernst & Young and the economic research firm Tax Policy Advisers to conduct an in-depth analysis. The study found creation of a narrow-based national Value Added Tax covering most of the same spending as current state sales taxes would result in the loss of 850,000 jobs in the first year while a broader VAT covering more expenditures like the one proposed today would cause an initial loss of 1.1 million jobs.
A VAT would also reduce gross domestic product for three years and bring a permanent drop in retail spending totaling $2.5 trillion over the first 10 years, the study found. By contrast an equivalent cut in government spending would result in the creation of 250,000 jobs, GDP would grow, and less than one-fifth of the loss in retail spending would be seen.
In addition, an opinion poll conducted by Penn Schoen Berland last week found 82 percent of Americans have an unfavorable view of a VAT.
The Washington-based BPC released a 138-page plan for reducing the nation’s deficit intended as an alternative to a proposal released last week by the co-chairmen of the National Commission on Fiscal Responsibility and Reform, former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson. The BPC is co-chaired by commission member Alice Rivlin, Office of Management and Budget director under former President Clinton, and former Senator Pete Domenici, R-N.M.
The BPC plan, among other provisions, would create a nationwide 6.5 percent “debt reduction sales tax” that would be levied in addition to existing state and local sales taxes and which would come in addition to existing federal income taxes. Despite the name, the proposal describes a European-style Value Added Tax, which was rejected under the Bowles-Simpson plan. The VAT would cover about 75 percent of goods and services, exempting government and charitable services but taxing virtually all personal consumption except rent. New home sales, privately funded health care, food and clothing would all be taxed under the plan.
Last month’s NRF study modeled three alternative scenarios including a broad-based VAT like the BPC proposal and a narrow-based VAT more similar to state sales tax bases. The macro-economic results under the broad and narrow-based VATS were fairly similar in showing a drop in GDP for the first several years and a dramatic drop in employment.
The NRF study found the average VAT rate around the world has increased 50 percent since the taxes were first established in each country. Organization for Economic Cooperation and Development data shows that European member countries with VATs experienced a 37 percent increase in the ratio of VAT revenue to GDP between 1975 and 2006.
“These taxes have all gone up dramatically since they were first adopted,” Shay said. “The 6.5 percent being talked about today is a significant amount to start with, and we could be looking at a much larger tax in just a short period of time.”
