VAT - Economic Effects of More Investment and Less Consumption

The National Retail Federation released a study on October 14 on the likely effects of a VAT in the US. The VAT used in the study was modeled on the European VAT which is a credit invoice VAT with a narrow base that excludes rent paid by consumers and purchases of homes, groceries, medicine, health care, financial services and education. The rate used in the study was 10.3%.

The report, prepared by Ernst and Young and Tax Policy Advisers, concluded that such a VAT could result in the loss of 850,000 jobs in retail and other industries, reduce GDP for three years and cause retail spending to decline by $2.5 trillion over ten years. Per the NRF, the drop in jobs would be 850,000 in the first year and "would remain down by 700,000 jobs for decades to come."

The NRF plans to submit the report to President Obama's Deficit Commission which is to issue its report and recommendation in early December 2010.

I think this is an interesting report. Proponents of a consumption tax at the national level usually argue that it will increase investment - meaning that if spending on consumption drops from taxing it at a higher rate, people will instead save more money. I've often wondered when I hear of proposals for a 23% national sales tax or even a VAT of 5% or more, what does happen to our economy when people buy less goods? While as a whole, we are likely buying more goods than we need (do people really need to buy clothes for their pets? more clothes than they can wear in a week? gadgets?), what does happen to the economy when this and other spending drops? I would think the economy realigns. Is that an economy we can live with? I think a lot of that depends on where the lost jobs fall among various income groups.

I'm glad to see the study because I don't think there has been near enough discussion of what our economy with a VAT - even as an add on to the income tax rather than a replacement, looks like.

The report is 72 pages long, but certainly worth the read.

What do you think?

VAT - Economic Effects of More Investment and Less Consumption 2010-10-18T04:30:00-07:00 Rating: 4.5 Diposkan Oleh: Unknown