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Retail group's analysis paints dire image of a value-added tax

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By Lori Montgomery
Thursday, October 14, 2010; 12:30 AM

Piling a European-style sales tax on top of the existing U.S. tax structure would immediately destroy 850,000 jobs and damage retail spending for years to come, according to an economic analysis commissioned by the National Retail Federation, a leading trade group.

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The report studied the potential effect of a 10.3 percent value-added tax, or VAT, a form of sales tax applied at every stage of production. The tax is ubiquitous around the world, having been adopted in more than 130 countries.

NRF president Matthew Shay said the study is intended to push back against what he views as a rising tide of interest in the VAT in Washington, where policymakers are eager to reduce record budget deficits.

"Supporters claim a VAT is the solution to the nation's economic ills, but nothing could be further from the truth," said Shay, who represents an industry that has long opposed a value-added tax. "This report has found that a VAT would have negative economic consequences for most working Americans alive today."

The study, conducted by Ernst and Young and economic research firm Tax Policy Advisers, assumed a VAT would cover most consumer goods and services but exempt home sales, rent, groceries, medicine, health care, financial services and education to ease the impact on low-income families. Such a tax, they said, would raise close to $400 billion a year, a sum that would significantly reduce budget deficits projected to hover around $1 trillion over the next decade.

However, the economic consequences would be dramatic, Shay said, with 850,000 jobs lost in the first year alone. Retailers, such as those represented by NRF, would be among the hardest-hit sectors of the economy, losing $2.5 trillion in business over the first decade.

The overall economy would also suffer at first, the study found, with gross domestic product dropping slightly - by 0.2 percent - in the first year. However, the economy would benefit from a value-added tax by the 10th year, the study found, because "lower deficits and debt would have positive long-run effects."

The report argues that reducing government spending by a comparable amount - $400 billion a year - is a preferable option for reducing deficits because it would boost economic growth by 0.1 percent in the first year and 0.7 percent in the 10th year. But cutting such a sum would be the equivalent of wiping out Medicare, and therefore politically difficult.

Shay said the NRF will submit the study to the bipartisan commission President Obama has appointed to develop a deficit-reduction plan. The commission is scheduled to issue its report in December. Shay said his group grew nervous about the value-added tax after seeing public comments from commission members, including co-directors Erskine Bowles and Alan Simpson.

"We take this very, very seriously," Shay said. "We think it's essential that policymakers understand the ramifications of this proposal before they go any further into conversation about approaches they might take to reduce the deficit."

Bowles and Simpson have declined to rule out a VAT, saying all options are on the table in the commission's discusions. Bowles also said on Fox News in April that one could make "good arguments for a value-added tax." But Bowles suggested that a VAT should be considered as an alternative to taxing wages, not as an add-on to the current system. And Simpson has said flatly, "You can't do a value-added tax without dealing with the income tax."

Commission executive director Bruce Reed laughed when asked about the prospect of the commission's 18 members - including six GOP lawmakers - recommending a VAT. Under the commission's charter, 14 members must agree for any policy to be adopted.

"The U.S. Senate got only 13 out of 100 members to support that policy," Reed said, referring to an April sense-of-the-Senate vote. "It seems unlikely that we could get 14 out of 18."


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