Newsletter

May 12, 2010 - Economist Warns VAT Could Come 'In Disguise,' Senator Calls New Taxes 'A Four-Letter Word'

A top economist warned retailers attending NRF’s annual Washington Leadership Conference this week that some proposals to reduce the federal deficit by creating a nationwide Value Added Tax could come “in disguise.” Meanwhile, a prominent senator speaking at the conference downplayed prospects for a VAT, calling any new tax “a four-letter word.”

“A VAT is going to be seen by many as a silver bullet to solve the deficit situation but in many situations it’s going to be in disguise and not as simple as a European style VAT,” Ernst and Young Director of Quantitative Economics Thomas Neubig said Tuesday. “You’re going to hear a lot about a broad-base consumption tax without it being called a VAT.”

Neubig said lawmakers wary of being seen placing a new tax on consumers might try to paint a VAT as a form of corporate income tax. Michigan called its state-level VAT a “single business tax” and a state VAT proposed in California last year would have been called a “business net receipts tax,” he said.

House Budget Committee Ranking Member Paul Ryan, R-Wisc., calls the subtraction VAT in his Roadmap for America Plan a “business consumption tax.”

“He doesn’t put the VAT-word in his description but that’s what it is,” Neubig said.

NRF has commissioned Ernst and Young and the economics firm Tax Policy Advisors to work together on a comprehensive study that will show the impact of a VAT on consumer spending, employment and gross domestic product. The move comes as former Federal Reserve Chairman Paul Volcker – now chairman of President Obama’s Economic Recovery Advisory Board – and others have urged that a VAT be considered to reduce the federal deficit from its highest share of gross domestic product since World War II.

Neubig said the study for NRF is expected to be done by September 1 so that results can be shown to Obama’s deficit reduction commission before the panel’s December 1 deadline to make its recommendations. Obama told the commission last month that nothing – including a VAT – should be considered off the table.

Neubig said the study will show not just the overall effect of a VAT but also its impact on low-income families and the elderly. Most economists consider a consumption tax regressive because poor families spend a larger percentage of their income than wealthy families. Seniors would be hard hit because they have already paid income tax on their earnings and would be taxed a second time as their savings are spent. The study, which assumes that a VAT would be added to the existing tax structure rather than used as a replacement, will also look at both broad and narrow VATs and the experience of other countries that have adopted a VAT.

“Discussion of a VAT is very much an economic issue as well as a political issue,” Neubig said. “Economic facts are going to be very important in the political discussion of the impact.”

While NRF is concerned that the higher prices that would come with a VAT would have a devastating effect on consumer spending and retail sales for many years, Neubig said many economists believe some form of consumption tax is inevitable because increasing taxes on high income individuals or corporations cannot bring in enough revenue to eliminate the deficit and Congress is unlikely to have the political will to cut spending sufficiently to do so. With the retirement of baby boomers driving up costs for Medicare and Social Security, the deficit’s percentage of GDP will hit “astronomical levels” if Congress doesn’t do something, he said.

Speaking at the conference on Wednesday morning, Senator Ben Nelson, D-Neb., downplayed the odds of a VAT receiving support among lawmakers.

“I don’t hear anybody seriously talking in the Senate about doing that,” Nelson said. “Tax is a four-letter word now. Academics talk about it but politicians aren’t talking about it.”

The Senate last month voted 85-13 to approve a non-binding amendment sponsored by Senator John McCain, R-Ariz., that called a VAT “a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery” and stated flatly “the Senate opposes a Value Added Tax.”

© 2010 National Retail Federation