The federation will launch the campaign at this week’s Labour Party Conference.
The cut would kick-start growth, lead to job creation and increase revenue to the Treasury, as well as widen the tax base.
Federation bosses believe the cut should be targeted on the construction and tourism sectors rather than a blanket VAT reduction which would “do more harm than good.”
They added: “This would be a much better use of money than spending £5 billion on rushed infrastructure projects which might not be ‘shovel ready’ and any lost revenue would be made up from additional demand, jobs and wider economic activies.”
John Walker, FSB National Chairman, said: “The FSB is concerned that without a more aggressive and proactive approach to promoting growth that the economy will stagnate and decline.
“While we agree with Labour that something needs to be done, we believe that a full reversal of the VAT rise is not the answer.
“The economy is too fragile to be kicked around like a political football during party conference season. We need to see all the parties working together and putting economic recovery first.
“The political sparring between parties about the cuts is not the answer and so tangible policies which deliver growth must be put in place to boost growth, jobs and UK plc.”