Today, the National Retail Federation released a study by Ernst & Young and Tax Policy Advisers that analyzes a 10.3% narrowly based “add-on” value added tax to reduce the deficit by 2% of GDP. It estimated a $2.5 trillion reduction in retail spending over the next decade and an initial loss of 850,000 of which 700,000 would be lost permanently. That’s the kind of scary analysis you want if you want to kill a proposal. I would note that any federal tax increase of 2% of GDP would have similar results, although with less impact on the retail sector.
The study is very well done, and two of its authors are good professional friends from when they worked at Treasury and CBO. Unlike many authors, they discuss the shortcomings of their model and they build in a lot of real world experience, particularly in their examination of VATs around the world. They show how compliance is a big problem, how much a VAT would hit the poor and the middle class, and how VAT rates rise over time. I would have liked some discussion of how difficult it will be to transition from our tax system to a VAT, but that issue will be thoroughly addressed before one is ever adopted here. There’s a lot to be learned by reading this study.