Hundreds of thousands of jobs could be created if VAT was cut by 5%, according to a report by pub, restaurant and hotel firms.
A number of leading companies in the sector, including Pizza Hut, Wetherspoon, Punch Taverns, Prezzo, Subway and TGI Friday's, are backing calls for the 20% rate to be reduced.
A survey by the Jacques Borel VAT Club, which represents 43 pub, hotel and restaurant operators, found that firms would pass on more than half of any VAT reduction in lowering prices.
The report said this would increase trade by up to 12%, leading to new jobs being created, and staff pay being raised.
A 5% cut would cost the Treasury between £5.5 billion and £7.8 billion, but the losses would reduce sharply as new jobs are created and tax increases, it was argued.
Jacques Borel, a French entrepreneur who has successfully campaigned for VAT reduction in hospitality across Europe, said: "The study shows that a targeted VAT reduction to 5% in the hospitality sector would be a very powerful and cost-effective way of creating employment in the UK.
"There would be an initial loss of revenue to the Treasury but, as many other countries in Europe have discovered, the losses are quickly reduced, and even made neutral, as the sector grows turnover and creates jobs.
"The UK should follow the lead of its European neighbours in boosting its economy and creating employment, particularly among the young, many of whom already begin their careers in the leisure sector."