VAT

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.