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Retailers Say Consumption Tax Would Cause ‘Great Disruption’ to U.S. Economy

WASHINGTON – The National Retail Federation today urged Congress to reject any form of consumption tax as it considers tax reform and instead focus on changes to the income tax system that would broaden the tax base in return for lower rates.

“Replacement of our current income tax system with a consumption tax system would cause great disruption to the U.S. economy,” NRF Senior Vice President for Government Relations David French said. “Congress should not consider making this type of change at a time when the economy is stagnant and consumer confidence is so low.”

Adding a consumption tax on top of the current income tax would have “even more negative consequences,” French said.

French’s remarks came in a letter to the House Ways and Means Committee, which is scheduled to hold a subcommittee hearing this afternoon on consumption tax proposals as part of a series of sessions on tax reform. Rather than taking testimony from affected parties, the Tax Policy Subcommittee is hearing from lawmakers who have proposed legislation on the issue.

While none have come close to passage, a variety of consumption tax concepts have come up in Congress over the past decade and a half, including a European-style Value Added Tax to replace the current income tax system, a VAT in addition to the current income tax, a National Retail Sales Tax and a Flat Tax. NRF and other opponents – including a number of leading economists – have argued that that the measures would bring higher prices that would decimate consumer spending, which makes up two-thirds of the nation’s economy.

“Regardless of label, the proposals under consideration in this hearing are all consumption taxes,” French wrote. “It is the wrong time to consider a tax system that would increase the tax burden on consumption.”

French said consumption taxes are borne disproportionately by low and moderate-income families, who spend a higher proportion of their income than wealthier families.

“NRF believes a better approach to tax reform would be through income tax changes that would lower rates and broaden the base,” French said. “Studies have shown that this type of tax reform would have favorable affects on the economy, wages and retail spending.”

A 2010 Ernst and Young study commissioned by NRF found that adding a 10 percent VAT to the income tax would result in the loss of 850,000 jobs in the first year, reduce gross domestic product for three years and bring a permanent drop in retail spending totaling $2.5 trillion over the first 10 years. A PricewaterhouseCoopers study conducted for NRF in 2000 said a Flat Tax would bring a five-year decline in GDP and a six-year decline in consumer spending while a National Retail Sales Tax would bring a four-year decline in GDP and an eight-year decline in spending.

By contrast, a 2014 review by the congressional Joint Tax Committee found that broadening the base by limiting tax deductions and exemptions and using the revenue saved to lower rates would cause employment, consumer spending and GDP to grow.

NRF is the world’s largest retail trade association, representing discount and department stores, home goods and specialty stores, Main Street merchants, grocers, wholesalers, chain restaurants and Internet retailers from the United States and more than 45 countries. Retail is the nation’s largest private sector employer, supporting one in four U.S. jobs – 42 million working Americans. Contributing $2.6 trillion to annual GDP, retail is a daily barometer for the nation’s economy. NRF’s This is Retail campaign highlights the industry’s opportunities for life-long careers, how retailers strengthen communities, and the critical role that retail plays in driving innovation.