A VAT Slammed By Retailers

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.

About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

1 Comment on A VAT Slammed By Retailers

  1. E&Y is wrong to assume an “ADD-ON” for VAT. Makes the conclusion obvious — increasing prices by 10% results in less consumer purchases.

    NO advocate of VAT would encourage introducing an “add-on” tax while the economy is so vulnerable. In fact, as Canada did, and Japan before her, it should be introduced with a tax cut! Later, after all practical spending cuts are made, if we still have to raise taxes, better a consumption tax than an increase in income taxes.

    But a strong argument can be made for VAT as a “revenue neutral” replacement for other taxes, i.e., the Corporate Income Tax. It would be stimulative, eliminate a major competitive disadvantage in world trade, incentivize the return of U.S. multinationals’ capital parked abroad, eliminate double-taxation of dividends. A broad-based VAT with no tax preferences would end lobbying for loopholes.

    See what Warren Buffett, Bill Clinton, Jeff Sachs, Fareed Zakaria, (ret.) Sen. Fritz Hollings and others say at reference site http://www.VAT-US.com.

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