Newsletter

November 10, 2010 - Deficit Commission Co-Chairmen Propose Spending Cuts and Income Tax Reform Rather than VAT

In an apparent win for retailers, the leaders of President Obama’s deficit reduction commission today released a proposal calling for government spending cuts and reform of the existing federal tax structure but not a European-style Value Added Tax that could bring job losses and a further slowdown in the nation’s economy.

“This proposal appears to be a clear indication that a VAT will not be included in the deficit commission’s final recommendations,” NRF President and CEO Matthew Shay said in a news release. “This is good news for the U.S. economy and American families because a VAT would cost our nation hundreds of thousands of badly needed jobs and would lower the standard of living for most working Americans.”

The proposal was released only a week after NRF presented the commission with an economic analysis showing that a VAT would cause 850,000 jobs to be lost and consumer spending to plummet $2.5 trillion over 10 years. An earlier NRF survey found that two-thirds of consumers said a VAT would impact their spending and 82 percent believed the deficit should be reduced by cutting government spending rather than creating a VAT.

“We are grateful that the commission staff took the time to meet with us on this issue, and that Chairmen Bowles and Simpson appear to have recognized that a VAT would be a part of the problem, not part of the solution,” Shay said. “We look forward to seeing the final recommendations and trust that a VAT or any other form of consumption tax will not be included.”

The two co-chairs of the National Commission on Fiscal Responsibility and Reform, former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, issued a 50-page proposal on ways to reduce the federal deficit following a closed-door meeting of the commission this morning. The proposal includes a variety of options to be considered by the full panel, which has a December 1 deadline to make recommendations to Congress. Details are available on the commission web site at www.fiscalcommission.gov.

“We have a patriotic duty to come together on a plan that will make America better off tomorrow than it is today,” Bowles and Simpson wrote. “America cannot be great if we go broke. Our economy will not grow and our country will not be able to compete without a plan to get this crushing debt burden off our back.”

The proposal would reduce the deficit by almost $4 trillion by 2020, with about three-quarters of the reduction coming from spending cuts and one-quarter from revenue increases. The plan includes cuts in both defense and non-defense discretionary spending, health care spending and other mandatory spending programs. The recommendations would eventually set both spending and taxes at 21 percent of gross domestic product.

The proposal includes no mention of a VAT or other consumption tax even though Bowles suggested earlier this year that the revenue increases should come from a VAT.

Instead, Bowles and Simpson suggested three options for income tax reform, each of which would broaden the tax base by eliminating a wide range of tax breaks but also lower tax rates. Some of the revenue derived from base broadening would be put toward deficit reduction, and the remainder would be used to pay for the lower rates. Additional revenue would be raised by increasing the gas tax, but that revenue would go toward fully funding the transportation trust fund so that it would no longer need general fund bailouts. Also, revenue would be raised by adjusting how the consumer price index is determined for both expenditure and tax provisions. 

Under the first tax reform option, there would be three individual rates and one corporate rate. The top individual rate could be as low as 23 percent, with a 26 percent corporate rate, if all tax expenditures were eliminated. The option provides a range of rates that would be needed if Congress couldn’t make all of the hard tax expenditure cuts, which would include elimination of the highly popular home mortgage interest deduction. 

The second option is modeled after the tax reform plan offered by Senators Ron Wyden, D-Ore., and Judd Gregg, R-N.H., which focuses more on corporate tax reform. The corporate tax rate would be reduced to 26 percent.

The third option would call on the tax-writing committees of Congress and the Treasury Department to develop a plan for comprehensive tax reform by the end of 2012. If they do not meet that deadline, there would be a 15 percent across-the-board reduction in tax breaks, and that “haircut” would be scheduled to increase over time if tax reform were not enacted.

NRF has long been concerned about the impact of a consumption tax on the economy, and earlier this year commissioned Ernst & Young and the economic research firm Tax Policy Advisers to conduct an in-depth analysis. The study, released last month, found that creation of an add-on VAT to reduce the deficit 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 totaling $2.5 trillion over the first 10 years. By contrast, the study found 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 spending would be seen.

NRF has worked extensively with members of Congress over the past year to explain the impact a VAT would have on the economy, and presented the study to the deficit commission’s staff last week.

The study, available at www.nrf.com/VAT, found that a 10.3 percent “narrow-based” VAT rate would be necessary to achieve deficit reduction goals while providing exemptions for necessities such as housing, groceries and health care, among others. At those rates, a VAT would cost taxpayers close to $400 billion annually. A family of four with an income of $70,000 would pay $2,400 in VAT taxes annually, a 100 percent increase over their current federal income tax payment.

© 2010 National Retail Federation