Forget Death and Taxes, How About Health and Taxes?
Like it or not, health care and taxes are inextricably linked in the U.S. The employer-sponsored health system that covers most of the non-elderly is largely built on nearly $200 billion in income tax breaks. The biggest: employer-sponsored insurance which is tax-free to workers. Perversely, this structure provides the biggest tax breaks to the highest income workers who get the most expensive plans.
Nearly all economists agree that this is terrible tax policy and many are looking for ways to fix it. Some want to drop the exclusion completely and use tax incentives to encourage the purchase of individual insurance. Some want to cap it for plans worth, say, $12,000 or more. Others want to turn the current deduction into a credit, which would benefit lower-income workers. Still others would take the money from tax breaks that now go to employer coverage and use it to help fund universal or near-universal insurance similar to plans proposed by Hillary Clinton and Barack Obama.
Others, such as Ezekial Emanuel and Victor Fuchs, have an even more ambitious idea. They’d 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.
Right now, with a new Administration just eight months from taking office, policy experts are putting a huge amount of energy into both health and tax reform. The expiration of the Bush tax cuts and the ongoing Alternative Minimum Tax mess will surely drive big tax changes in 2009 or 2010. Health reform is also on the table, although short-term odds for reform may be longer. The question is: How will these two mega-issues fit together?
An income tax is not necessary in addition to the VAT. Just as an EITC is in operation today, a Prebate or Quarterly/Semi-Annual/Annual Rebate [pick one] could be used to adjust low-to-moderate income purchasers net VAT.
If not available to non-U.S. citizens (such as Canada's BC provincial GST of 6.7% or 7% is not refunded), then U.S. would wind up paying a net VAT. This could all be done on a sliding scale, with the rebate decreasing over time throughout the year.
I would say that an income tax is NOT needed. An entire economy could run on VAT and similar consumption taxes. But a shift to a full VAT system is probably a longer-term proposition, and as the Keynesians would remind us, “In the long-term, we're all dead!” So maybe focusing on what's 'doable for now' is best. Fortunately, if I'm not mistaken, moving toward a partial VAT system seems to cross party boundaries, so maybe it's not impossible to realize sometime soon. As has already been mentioned, it already works in many other countries (I'm in Europe), so it's not a big risk. One advantage of having VAT, even if hybridized with income tax, is that 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, I've seen many good arguments ranging from 0 to 'very high.' I personally like the idea of indexing the amount someone can earn (or spend, as pertains to VAT) tax-free to the poverty line or some similar measure. In a system that's purely comprised of VAT/sales tax (no income tax), everyone would claim a rebate, allowing them to spend tax-free up to that level.
Generally, I support Milton Friedman's idea of Basic Income via a Negative Income Tax.
http://economistsview.typepad.com/economistsview/2006/11/milton_friedman_1.html
It would 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–only much bigger. That's one thing W actually got right. Generally, insofar as income tax goes, I prefer a flat tax over a stepped progressive. With the exemption and BI, the income curve would be inherently smooth-progressive despite the tax rate being nominally flat. Of course, that's based on the assumption that BI covers the entire below-poverty-line deficit. If not, then there's a step. In any case, it's very refined, IMO.
But since your 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 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!
It is good to hear people honestly use the “VAT” word. This brings far more credibility and honesty to tax reform debates. After all, the flat tax that gets so much attention is a modified subtraction VAT.
We see states today struggling with making their sales taxes work and some have enacted or are considering gross receipts taxes. A VAT would be better options as it would (should if structured right) eliminate pyramiding.
A VAT along with an income tax focused on high income taxpayers is an even more honest idea since VATs are regressive and to help achieve revenue AND distributional neutrality, the income tax is needed.
The GAO issued a report at the request of two House Ways & Means Committee members this week. It looks at VAT in 5 countries including two with fairly new VATs. It looks like a good report and raises another good point – there is so much VAT experience in the world that we can learn a lot about how to do it right from the experiences of other countries(should we pursue a VAT and modified income tax in upcoming reform efforts).
I just posted an entry on VAT the other day with links to the GAO report. I note the perceived “VAT-phobia” in this country – something we'll have to get past to have better tax reform discussions.