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A Whole New Tax for Health Care?

This is a surprising nugget:

Democrats on three House panels continue to meet privately to seek consensus on a single plan. Democrats on the House Ways and Means Committee said they were trying to decide whether to finance coverage of the uninsured with one broad-based tax, like the value-added tax, or a combination of smaller taxes.

The value-added tax, common in other countries, is collected in stages from each business that contributes to the production and sale of consumer goods. Economists say a 5 percent VAT could have raised $285 billion last year.

A VAT is a good idea. But not in this context. The way most European countries use the VAT -- which acts like a national sales tax -- is simple: You pay the VAT and receive health-care coverage in return. The VAT, in their systems, acts like a premium. That's also how the VAT would work in the voucher system proposed by Ezekiel Emmanuel and Victor Fuchs and the health reform plans proposed by the Tax Policy Center's Len Burman. It makes a lot of sense.

But this doesn't make much sense at all. Levying a VAT to pay for coverage of the uninsured seems like a quick way to kill health-care reform. For the 85 percent of Americans with health insurance coverage, the VAT would be nothing but a charity tax. It wouldn't buy them anything, as it does in the European systems. It wouldn't free them from premiums, as it does in the Emmanuel/Fuchs voucher program. Republicans would view it as a major new tax. If Congress wants to rebuild American health care around a VAT, that's probably a good idea. But simply slapping a new national sales tax atop the existing system? That doesn't get you anything in terms of efficiency, and it's going to scare the hell out of the middle class.

Update: For more on developments with the VAT tax, read Lori Montgomery.

By Ezra Klein  |  June 16, 2009; 11:30 AM ET
Categories:  Health Reform  
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Good lord. So many bad ideas ...

Posted by: eRobin1 | June 16, 2009 12:00 PM | Report abuse


I agree. For one, you don't add a brand new tax during a recession/depression.

Secondly, we need to find more of the money within the health care system, as Obama proposes. Congress is afraid of the lobbyists, but the administration isn't.

In President Obama's second term, the admnistation might think about a VAT, and the system Emanuel & Fuchs proposed in Healthcare,Guaranteed.

But first we have to create a more efficient system while getting everyone covered under that system. That means cracking down on the profiteering, implementing MedPac's recommendations, applying them both to Medicare and to a public-sector plan. Private insurers will follow Medicare's lead as they do now.

Posted by: mahar1 | June 16, 2009 1:00 PM | Report abuse

Ezra writes: ****For the 85 percent of Americans with health insurance coverage, the VAT would be nothing but a charity tax. It wouldn't buy them anything, as it does in the European systems****

Ezra: For once I disagree with you on a matter related to healthcare reform.

I think your statement above makes sense ONLY if the VAT that's being proposed is a dedicated tax -- and the revenues cannot be used any place else (or if it's going to be marketed as a measure needed solely to finance healthcare reform). Maybe that is in fact what's being proposed. But the bottom line is money is fungible. The VAT might not buy you coverage if you've already got private coverage via, say, your employer. But it will buy you a smaller debt load for your grandchildren. Or lower marginal income tax rates than might otherwise be needed. Or lower payroll tax rates than might otherwise be needed. Or cleaner national parks. Or higher quality civil servants.

I think your point is a strong one if you are contending that a VAT to fund healthcare isn't a political winner if it's sold as such. But if it's sold as a prudent revenue enhancement -- along with other prudent measures -- to start addressing the country's long term fiscal pressures, I don't see the problem. In fact, I don't see any way of avoiding more consumption taxation in the long term if the country is going to both A) pay its bills and, B) undertake a reasonable expansion of the safety net. I think the experience of the Europeans and Canadians show there's only so much to be gained via raising income taxes on the wealthy (as much as I support doing so) because your tax base starts to become too narrow. This is especially true in light of the fact that (pass a handkerchief, please) the incomes of the rich are being squeezed by the crisis harder than those of their poorer cousins.

Anyway, as far as I'm concerned, the sooner we face up to the inevitable and enact a VAT, the better.

Posted by: Jasper99 | June 16, 2009 2:36 PM | Report abuse

Why can't we just view the VAT as an efficient and fair way to raise government revenue in order to pay for the government programs that people are demanding? For 3 decades now, Republicans have cut taxes and increased spending. Meanwhile, Obama just got elected on a platform of huge spending increases and tax cuts for 95% of Americans. At some point, can't we just have a government revenue raiser that actually requires most Americans to make modest sacrifices in order to pay for the programs that people claim they want?

Posted by: Dellis2 | June 16, 2009 2:37 PM | Report abuse

FWIW, I disagree. Already insured people are not getting nothing, they're getting increased security, community rating & other safeguards against crappy insurance, greater freedom to switch jobs, freedom from worry that young adults & unemployed in their lives, or anyone they care about, will slip through the insurance cracks, all the benefits that only come with a universal system.

They're greatly increasing the chance that they won't be sent $16000 bills for appendicitis, or $14000 for one day in a hospital, ala Pandagon & Arthur Silber.

Posted by: roublen | June 16, 2009 3:03 PM | Report abuse

If you really believe in a VAT on the merits, you shouldn't be afraid to propose something, try to convince people, and see how they respond. If people hate it, they hate it, but if you never propose it, you'll never find out what people hate and what they don't. Plus, everyone who opposes a particular proposal should be asked what their alternative is.

Posted by: roublen | June 16, 2009 3:13 PM | Report abuse

"The VAT, in their systems, acts like a premium."

Again: no, it doesn't.

In France, healthcare costs are considered part of an 8% payroll tax, the social charge. In the UK, they're considered part of National Insurance contributions-- again, a payroll tax. General revenue makes up the difference. In Canada, healthcare is funded out of general revenue. (And when you have a payroll tax with a ceiling, it comes out of the paycheck, like people's employment-based premiums.)

Some of the money from VAT/TVA/GST may go towards healthcare as part of general revenue, but nobody considers healthcare as "what you get in return".

You're just plain wrong on this, Ezra, and you ought to stop repeating it.

Posted by: pseudonymousinnc | June 16, 2009 6:14 PM | Report abuse

I would like to once again second in the strongest possible terms what pseudonymousinnc has said.

VAT is hugely regressive, and imposes an accounting burden on small business. It also generates a huge amount of litigation, and revenue for lawyers. I would say that a progressive tax and benefits system should be moving away from sales taxes.

Posted by: albamus | June 17, 2009 7:20 AM | Report abuse

albamus, yes, a VAT will be some burden on small and large business, much as there is a burden to collect a sales tax for goods sold at retail. But suppose that VAT was used to provide basic health care for everyone, replacing business-provided health benefits (the Zeke Emanuel plan). I think business would be happy to have a VAT rather than have to deal with company-provided health care.

Posted by: gdelphey | June 19, 2009 3:42 PM | Report abuse

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