VAT and Health Care Reform
Responding to a recent comment by Libertarian Finlander, I noted that I didn't necessarily have any theoretical objections to a national value-added tax, but that I wanted universal health care first. After writing my response, I ran across this interesting post by TPC's Howard Gleckman on some recent proposals to combine a VAT with health care reform:
... Ezekial Emanuel and Victor Fuchs ... [would] create a European-style Value Added Tax and use the huge slug of new revenue for health care vouchers, which people would use to help buy insurance.
My TPC colleague Len Burman, who comes at the problem from the perspective of tax reform as well as health care reform, would go yet another step. He’d create a VAT of about 15 percent to fund these health vouchers. But Burman would also use the VAT revenue to reform and simplify the income tax.
He’d set two individual rates—say, 15 percent and 25 percent—and eliminate the personal exemption, the standard deduction, and most itemized deductions. He’d also dump the exclusion for employer-sponsored health insurance and vastly simplify retirement savings incentives.
Burman’s VAT would not only help pay for private insurance, it would also finance Medicaid, veterans health, and the share of Medicare that is now supported through general revenues (about $200 billion in 2009).
Burman is hardly the first policy maven to push the VAT. Yale professor Michael Graetz backs one of roughly 10 percent to 14 percent. However, Graetz would use the VAT revenue to eliminate the income tax for nearly all taxpayers—those earning less than, say $100,000. The TPC’s Bill Gale has also suggested a VAT, but as an additional source of revenue rather than as a replacement for the income tax.
These proposals are all worth a look, but a U.S. shift to a VAT is a much longer-term proposition than (hopefully) health care reform that gets costs under control and expands coverage to all Americans.
Yes, a shift to VAT is probably a longer-term proposition, and as the Keynesians would remind us, "In the long-term, we're all dead!" Fortunately though, the idea seems to cross party boundaries, so maybe it's not impossible to realize sometime soon. It already works in many other countries, so it's not a big risk. I would predict that the income tax will stay intact even if a VAT/sales tax is implemented. But having an economy that's even partly funded by VAT/sales tax is an advantage, because it's far more impervious to political manipulation. Also, it'd be a good step in minimizing the economically damaging effects of all those deductions that currently exist.
The home interest deduction is a perfect example; it looks great on the surface--most home owners probably couldn't imagine living without it--but does it really make sense to induce people to use their homes as investment vehicles? The bigger the better?? And by virtue of a regressive deduction??? I would much rather prefer a very high generalized exemption. That way I can choose whether to rent or own, without taking a penalty for making the 'wrong choice.' But from a political standpoint, how do you get rid of such an 'ingrained institution' as the mortgage deduction? This is where VAT/sales tax can serve as a helpful tool to phase it out.
Insofar as the exemption goes (assuming the income tax stays intact), I've seen many good arguments ranging from 0 to...well, 100,000K as stated above. I personally like the idea of indexing the amount someone can earn tax-free to the poverty line. In a system that's purely comprised of VAT/sales tax (no income tax), everyone would claim a rebate up to that same level. And as I've indicated before, I support Milton Friedman's idea of Basic Income via a Negative Income Tax. It could mean that any income deficit below the poverty line can be filled (either fully or partially) by a direct payment similar to Bush's recent stimulus payment. As I've said before, that's one thing he actually got right. Generally, I prefer a flat tax over a stepped progressive mentioned above--remember, there are lots of flat-taxers on the Republican side. With the exemption and BI, it would be inherently smooth-progressive despite being nominally flat. Very refined, IMO.
But since your first concern is universal healthcare, I'd look at it as a voucher that 'fits into' the BI/NIT framework. In my opinion, it would invoke the most support from both sides of the isle. Whether or not you can get the VAT/sales tax might not be a deciding factor for universal health. But making noise about it could bring attention to the need for simplifying the current income tax--that might indeed be a deciding factor to getting universal healthcare. Cheers!