Talking VAT

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In most countries, there’s a national health care system. A national health care system would be desirable. But it would also require more government revenue. And in most countries, there’s a Value Added Tax, which is a consumption tax that’s implemented in a different way from the retail sales taxes we have in the United States, but that’s basically similar in its impact. So it’s natural that people turn to the idea that a VAT might be the way to pay for health care reform. Indeed, once upon a time paying for health care reform through a dedicated VAT was a CAP policy position. And indeed just about everyone who looks at the budgetary situation sees a VAT as a possibility at least some of the time. The problem, though, is that this is probably the tax that progressives least want to put in place, and also the one that’s easiest for conservatives to attack. To get a VAT, you’d probably need a totally different political dynamic in which the right is prepared to concede the need for a revenue source, and therefore you get a compromise around a right-friendly form of tax increase. At any rate, The Washington Post had a VAT article yesterday that put it thusly:

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American — a tangible benefit that would be highly valuable to low-income families.

This last thing is a point I’ve made before and, indeed, make again in a new American Prospect article—the net impact of a regressive tax to finance new social spending is progressive. What’s more, it would actually be pretty easy to make the VAT dramatically more friendly to poor people by exempting groceries and basic clothing items, since those account for a much larger share of the poor’s consumption bundles. That would render a VAT less regressive than the existing FICA tax for Social Security and Medicare. If you set the VAT rate high, that would then let you reconfigure the income tax into something closer to its original mission as a highly progressive tax that falls on a wealthy minority rather than its current status as a kind of workhorse revenue source drawing from the middle class. A federal VAT would also simplify state and local tax procedures, assuming states did the sensible thing and dropped their retail sales taxes in favor of piggyback VATs.

At any rate, I don’t really see this coming any time soon, but it’ll probably come some time. But if I were to see the country undertake any giant controversial tax measures, what I’d like to see done first is a substantial overhaul of the individual and corporate income taxes, aimed at broadening the tax base and lowering the rates.