WASHINGTON — Retailers took a stand against consumption tax measures on Tuesday as a Congressional committee convened a hearing on several proposals aimed at tax reform.
The National Retail Federation sent a letter to the chairman and ranking member of the House Ways and Means Tax Policy subcommittee outlining its concerns about “consumption-based approaches to taxation.”
Various forms of consumption taxes have also been a topic on the presidential campaign trail. GOP presidential contender Sen. Ted Cruz (R., Tex.), for example, is a proponent of replacing the current tax system with a 10 percent flat tax on personal income and a 16 percent tax on businesses.
The House subcommittee considered proposals Tuesday, but only called lawmakers who have proposed legislation on the issue to testify, which prompted the NRF to send a letter on behalf of retailers.
“Replacement of our current income tax system with a consumption tax system would cause great disruption to the U.S. economy,” said David French, senior vice president of government relations at the National Retail Federation. “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.
While no consumption tax measures have been approved by Congress, there have been several bills introduced for more than a decade, including a European-style VAT to replace the current income tax system, a VAT on top of the current income tax, a flat tax and a national retail sales tax, NRF said.
A VAT tax is a type of consumption tax that is placed on a product whenever value is added at each stage of the production chain.
“NRF and other opponents — including a number of leading economists — have argued that the measures would bring higher prices that would decimate consumer spending, which makes up two-thirds of the nation’s economy,” the association said.
NRF commissioned a study by Ernst and Young in 2010 that found adding a 10 percent VAT to the income tax would result in the loss of 850,000 jobs in the first year, while reducing gross domestic product for three years and bringing a “permanent” drop in retail spending, totaling $2.5 trillion over the first 10 years.
A PricewaterhouseCoopers study conducted for NRF in 2000 found that 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.
However, some lawmakers and economists favor flat taxes and VATs.
Cruz, who is trailing Donald Trump for the Republican presidential nomination, has made bold proposals for a flat tax. He has proposed replacing the corporate income tax of 35 percent with a simple flat tax for businesses of 16 percent. According to a fact sheet on his campaign Web site, the flat tax would be based on revenues minus expenses such as equipment, computers and other business investments. Cruz has also proposed to allow for full and immediate expensing of business equipment and repeal the estate tax.
Citing the Tax Foundation, the Cruz campaign said a flat tax will boost GDP by 13.9 percent, increase wages 12.2 percent and create an additional 4.8 million jobs.
French said consumption taxes have a disproportionate impact on 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 effects on the economy, wages and retail spending.”