How a VAT would affect growth
Just how would tacking a 10 percent value-added tax onto the current tax system affect the economy? Well, an Ernst & Young study commissioned by the National Retail Federation came up with this result:
1. An add-on VAT would reduce retail spending by $2.5 trillion over the next decade. Retail spending would decline by almost $260 billion or 5.0 percent in the first year after enactment of the VAT.
2. An add-on VAT would cause GDP to fall for several years. The economy would lose 850,000 jobs in the first year, and there would be 700,000 fewer jobs ten years later. By comparison, a comparable reduction in the deficit through reduced government spending would have less adverse effects on the economy, and could have positive effects for economic growth.
3. Although lower deficits and debt would have positive long-run effects for the economy, most Americans over 21 years of age when the VAT is enacted would be worse off due to enactment of an add-on VAT. A VAT would have significant redistributional effects across generations, reducing real incomes and employment for current workers.
Me: Even though this is sponsored by a retailing trade group, the results are hardly shocking since an add-on VAT is a massive tax increase. Replacing the current tax system with a consumption tax is one thing, but this would take the US tax burden to record levels. And those levels would likely rise with time given the international experience with the VAT: