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Value-Added Tax Could Cost 850,000 Jobs: Retail Group

The National Retail Federation is trying to put some numbers behind its argument against a value-added tax, which is one option being considered by a presidential commission looking into ways of reducing the ballooning federal deficit.

Mike Kemp  | Getty Images

The retail industry's trade group said a study it commissioned estimates a European-style VAT would result in the loss of 850,000 jobs in its first year, reduce the US gross domestic product for three years, and cut retail spending by $2.5 billion over its first decade.

The study, which was conducted by Ernst and Young and economic research firm Tax Policy Advisers, concluded that although lower deficits would have positive long-run effects for the economy, most Americans would be worse off due to the VAT.

Talk of a VAT has surfaced in recent months as a way of dealing with the rising federal deficit, which is currently at its highest share of GDP since World War II.

Although policymakers who are considering such a measure have not offered specifics about what a VAT would look like, the calculations in the study were based on a "narrow-based" VAT similar to VATs in other countries. In order to achieve the goal of reducing the annual federal deficit by 2 percent of GDP, the VAT would need to be 10.3 percent.

The study also assumed the VAT would be applied to most consumer goods and services but would exempt sales of homes, rent, groceries medicine, health care, financial services and education to ease the tax's regressive impact on low-income families.

"In the face of an economy that continues to struggle, immediate enactment of an add-on VAT would pose serious risk. The drop in retail spending, jobs, and GDP under an add-on VAT has the potential to further weaken the economy in the near term, rather than strengthen it," the study's authors wrote.

The study also notes that other countries have reduced, not increased, their VATs in the face of the recent economic downturn.

The authors expect retail spending would fall by 5.0 percent, or almost $260 billion, as consumers adjust to the tax.

It's also assumed that the VAT would be in additional to other taxes, which means middle-income families would get hit the hardest. It is estimated a family of four making roughly $70,000 a year would pay $2,400 a year in value-added taxes. That would increase their tax burden by 100 percent.

A family making $100,000 would pay $2,800 in VAT, or an increase of more than 40 percent to of their current federal income tax liability.

Meanwhile, families earning $40,000 would pay $1,800 in VAT. Currently families at that income level don't have a federal income tax liability.

"This report has found that a VAT would have negative economic consequences for most working Americans alive today," said NRF President and CEO Matthew Shay. "If Congress wants to reduce the deficit, the solution is to cut spending, not create a new tax."

In August, the NRF commissioned a survey by BIGresearch that found nearly two-thirds of Americans expect a VAT would impact their spending.

Questions? Comments? Email us at consumernation@cnbc.com

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