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."
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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.
The 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?