On December 11, 2014, Senate Finance Committee member Benjamin L. Cardin, D-Md., introduced S. 3005, the Progressive Consumption Tax Act of 2014, which calls for the adoption of a 10 percent VAT. The adoption of a VAT would have far-reaching effects on the economy, including the Social Security program.
In a recent Tax Notes article, Blaise Sonnier and Nancy Nichols discuss the impact of the proposed VAT on Social Security recipients and other groups. Unfortunately, an important part of their analysis of the VAT’s impact on Social Security recipients is incorrect. Their assertion that the tax would reduce current retirees’ real benefits by 10 percent is invalid because the program’s automatic cost of living adjustment would compensate the retirees for any price increase caused by the VAT.
Sonnier and Nichols’ analysis is closer to the mark for future recipients, however, as the proposed VAT would reduce their real benefits by 9.09 percent. The benefit reduction would occur through the VAT’s effect on real wages, which play a crucial role in the formula determining recipients’ real benefits. Examination of the Social Security benefit formula reveals that a VAT has significantly more adverse effects on recipients who turn 60 in the year in which the tax is introduced than on those who turn 60 in the preceding year. To prevent that unwarranted disparity and other unintended interactions with the Social Security program, the adoption of a VAT should be accompanied by appropriate revisions to the Social Security tax and benefit structure.
Tax Notes subscribers can read the full article here.
Non-subscribers can read the article on this page on November 16.
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