NRF Study Wrong – VAT Not an Add-On, 10/14/10

Ernst & Young releases, today, its report on “The Macroeconomic Effects of an Add-On Value Added Tax,” prepared for the National Retail Foundation (NRF).

The point of contention in this report is the assumption of using a VAT to increase (“add-on”) taxes.  The conclusion of the E&Y report is obvious:  increasing prices by 10 percent will result in a reduction in consumer purchases.

No advocate of a VAT would encourage introducing an “add-on” tax while the economy is so vulnerable.  But, a strong argument can be made for introducing a VAT as a revenue-neutral replacement for other taxes.  Later, after the economy recovers, and after all practical cuts in spending are addressed, there will likely still be a need to raise taxes;  at that point only, the VAT would then be in place, as a preferred alternative to increasing income taxes.

The economic stimulus of a VAT as a revenue-neutral replacement of the Corporate Income Tax:

–  American business and labor would be more competitive in international trade.  Under GATT rules the VAT is subtracted from exports and applied to imports, thus removing the burden of government from the price/value comparison.

– Eliminates the incentive for multi-nationals to use transfer pricing to shift profits to lower-taxed countries.  This would bring capital back to the U.S. for reinvestment here, and would make the U.S. the strongest magnet for foreign corporate investment.

– Ends the double-taxation of dividends.

– Eliminates the lobbying for loopholes with a broad-based VAT without preferences.

–  An off-budget stimulus, as the knowledge of a date-certain implementation of a VAT  as consumers would speed-up purchases to avoid the tax.