Newsletter

December 1, 2010 - Final Deficit Commission Report Favors Spending Cuts and Tax Reform Over VAT

The co-chairmen of President Obama’s deficit reduction commission issued their final recommendations today, sticking with a plan that emphasizes government spending cuts and reform of the existing federal tax structure rather than creation of a European-style Value Added Tax that could cost the nation hundreds of thousands of jobs.

“The commission’s leaders have come to the same conclusion reached in our study: that bringing runaway government spending under control and working to improve the tax system we have is the best way to reduce our nation’s soaring deficit and improve economic growth,” NRF President and CEO Matthew Shay said. “It is vital that the deficit be reduced to manageable levels and not passed on to our children, but the way to do that is through initiatives that put Americans to work. Creation of a VAT would have disastrous consequences for job creation, GDP and the standard of living for millions of American families while spending cuts could achieve deficit reduction without the economic harm of a new tax.”

National Commission on Fiscal Responsibility and Reform co-chairs Erskine Bowles and Alan Simpson this morning unveiled final recommendations largely similar to a proposal they released last month. But a vote by the full 18-member panel has been delayed until Friday, and Bowles and Simpson said it would be difficult to gain the 14 votes the commission needs in order to agree on recommendations and officially send them to Congress. The Bowles-Simpson recommendations call for cuts in military and domestic spending, elimination of most tax deductions and credits in exchange for lower rates, higher Medicare premiums, smaller Social Security checks and raising the retirement age, among other provisions.

NRF in October presented the commission with an in-depth economic analysis of the impact of a VAT conducted for NRF by Ernst & Young and the economic research firm Tax Policy Advisers. The study 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.

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