Tax Panel Recommendation Would Drive Up Consumer Prices ($207B)

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Tax Panel Recommendation Would Drive Up Consumer Prices

WASHINGTON, D.C., October 18, 2005 — Prices for billions of dollars worth of consumer goods would be driven up dramatically under a proposal endorsed today by the President’s Advisory Panel on Federal Tax Reform that would end the corporate tax deduction for imported goods.

“Reform of the federal tax system does little good if it creates a huge new hidden tax for consumers,” NRF Vice President and Tax Counsel Rachelle Bernstein said. “The vast majority of consumer goods sold in this country are manufactured overseas and the cost of that merchandise has always been deductible just like employee salaries or any other business expense. If retailers can’t deduct those costs, they will be forced to pass the added expense on to consumers. Anything taxpayers gain through lower tax rates or a simpler tax return could be lost through higher prices at the cash register.”

“A dramatic increase in the cost of imported goods could send consumer spending into a tailspin, taking all of the jobs associated with those goods along with it,” Bernstein said. “The Advisory Panel rejected a National Retail Sales Tax because of its impact on consumer spending and should realize that this proposal would have much of the same effect. Consumer spending has been the backbone of our economy in recent years and we can’t afford to take this risk.”

The Advisory Panel today agreed to include three proposals in the report scheduled to be delivered to Treasury Secretary John Snow on November 1. One would be a revamping of the existing income tax system. A second would be a “progressive consumption tax” that would look like an income tax but would reduce taxes on savings and investments. The third, which would be included but not recommended, would be an add-on Value Added Tax.

Under the progressive consumption tax, the corporate income tax deduction for all imports, including consumer goods, raw materials and other items, would be eliminated. Massachusetts Institute of Technology economist John Poterba, a member of the Advisory Panel, contended that importers would not be hurt in the long run because exchange rates would adjust to compensate. He conceded, however, that there would be transition problems and recommended that importers be given a credit based on past import levels to ease the transition.

A total of $648 billion in general merchandise consumer goods were imported into the United States during 2004, according to U.S. Census Bureau statistics. At the 32 percent corporate rate proposed under the progressive consumption tax, that figure would result in $207 billion in new taxes that importers would be forced to pass on to consumers. Relatively few consumer goods are manufactured at competitive prices or in commercial quantities in the United States, leaving little possibility of a short-term shift to domestic products.

NRF has worked extensively on federal tax reform, and helped defeat a National Retail Sales Tax proposal rejected by the Advisory Panel last week.