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Tilting at Windmills

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November 1, 2007
By: Kevin Drum

THE HEALTHCARE BANDWAGON....Over the past year or so a fair number of corporate executives have joined the bandwagon for national healthcare. Now a new business group is adding its voice:

The leading small-business organization, a lobbying juggernaut that helped kill President Clinton's health plan in the 1990s, plans to announce today that it is signing up with a diverse political coalition promoting access to affordable healthcare for all.

The National Federation of Independent Business will join AARP, the Service Employees International Union and the Business Roundtable — which represents chief executives of major companies — in an umbrella group called Divided We Fail. The effort is aimed at ensuring that healthcare and retirement security are at the top of the presidential candidates' domestic agendas next year.

The strange bedfellows are trying to forestall the kind of political polarization that doomed Clinton's healthcare plan, as well as President Bush's effort to overhaul Social Security.

This is every bit as ironic as it seems, since there was no group in the country more responsible than NFIB for the "political polarization that doomed Clinton's healthcare plan." They were, as Ron Pollack says later in the article, "vituperative."

But as near as I can tell, their only really deep concern is and always has been making sure that small businesses aren't singled out to pay directly for national healthcare. Take that off the table and they're probably pretty malleable on the rest of the details. This is one of the reasons I support a national Value Added Tax as the funding source for a genuine universal plan. In practice, a VAT acts a lot like a sales tax that's collected at each stage of production, and as a healthcare funding source it has the advantage of being both large and stable. Here's a quick rundown of its other benefits:

  1. There's no pay-or-play mandate (i.e., either provide healthcare or pay a special tax). Businesses hate this, and small businesses really hate it, since they're the ones who usually have to pay. Conversely, a VAT is simple and universal, treating everyone equally.

  2. Very small businesseses are usually excluded from a VAT, so tiny startups and one-man shows don't have to worry about it.

  3. Economically, it's pretty efficient. Compared to other taxes, the deadweight loss is pretty small. Also, VATs are refundable on exports, so it wouldn't reduce the global competitiveness of U.S. business.

  4. It's a universal tax, not just a tax on the rich. As FDR recognized, people don't want charity. They want to feel like they're getting something they've paid for. A VAT can be structured so the rich pay more (see below), but everyone pays something.

  5. Most VATs exclude some items in order to keep the hit on the poor low. If you exclude food and housing from the VAT, for example, a VAT is relatively progressive. (Not as much as a progressive income tax, but not too bad either.)

  6. If you take a look at the relative benefits paid out, it looks even more progressive. If you have an income of $25,000 for example, but exclude food and housing worth $15,000, a 10% VAT ends us costing you about $1,000 per year. If you make $500,000 and exclude $250,000 (food and housing plus money you don't spend on consumption), you end up paying about $25,000.

    But both families end up receiving identical healthcare benefits, worth roughly $12,000 for a family of four. So the first family has a net benefit of +$11,000 while the better off family has a net benefit of -$13,000. That's pretty progressive.

A back-of-the-envelope calculation suggests that a VAT of 12%, when added to the state and federal funding we already have for healthcare, would be sufficient to fund a pretty comprehensive program. Other sources might have to be added as healthcare costs rise in the future, though that can be kept to a minimum if we put together a smart program that limits the rise of healthcare costs. Ordinary increases in program cost are handled automatically since a VAT generally produces a steady percentage of GDP, and therefore increases as GDP increases.

Would NFIB go for it? I don't know. But I'll bet a pretty good case could be made for accepting it. It's an option we ought to be considering a lot more seriously than we are.

Kevin Drum 12:34 PM Permalink | Trackbacks | Comments (34)

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Comments

I guarantee any VAT that could be put in place in this country would be regressive, given who holds the power and writes the bills.

Posted by: Gore/Edwards 08 on November 1, 2007 at 12:47 PM | PERMALINK

Why create yet another set of rules and bureaucracy with a VAT? Why not just use income tax to fund it?

Posted by: nerd on November 1, 2007 at 12:53 PM | PERMALINK

So, a family with an income of $25,000 pays $1,000 and receives benefits of $12,000 a year, while a family that makes $500,000 pays $30,000 and also receives $12,000 a year.

Silly Kevin. Don't you realize how unfair this is? The slackers who are too lazy to work hard to make more money get to live off the sweat and toil of the honest and hardworking folks who earned their half a mil a year. Don't you know that poor people are poor because they lack judgment and motivation while the rich deserve to be rich because they make good decisions and work harder? That's what the National Review tells me...
___________________________

Posted by: Aris on November 1, 2007 at 12:56 PM | PERMALINK

Since the entire cumulative cost of the VAT will ultimately be borne by the consumer, you have just proposed that every person now covered by an employer health plan will not only get socked with a not insignificant new tax, but will in all likelihood lose a large chunk of their current compensation package.

Yeah, that's going to go over well.

Posted by: SteveK on November 1, 2007 at 1:02 PM | PERMALINK

Gore: Well, maybe, but that applies to any funding source, doesn't it? If we get a Democratic president and bigger Dem majority in Congress next year, it should be possible to get something decent.

Nerd: Because it would increase the income tax rate to dangerously high levels. A VAT is a more efficient revenue source, and it also puts our eggs in more baskets.

There's no reason a national healthcare plan has to be funded entirely by a VAT, of course, and I'm assuming that we'd continue to use the revenue we currently get from payroll taxes and income taxes. Maybe we want to add a carbon tax into the mix. I'm not sure. But there are a limited number of sources for large sums of money, which is what a universal healthcare plan would need, and a VAT is one of them.

Posted by: Kevin Drum on November 1, 2007 at 1:02 PM | PERMALINK

This is one of the reasons I support a national Value Added Tax as the funding source for a genuine universal plan.
As FDR recognized, people don't want charity. They want to feel like they're getting something they've paid for.

Kevin, I support a VAT too, but wouldn't it be better to use the VAT to replace the corporate income tax? As the National Review points out, the corporate income tax causes jobs to be killed and raises the cost of running a business. Replacing the corporate income tax with the VAT would spur economic growth which would raise enough revenue to finance your universal health plan. Also, it would make Americans happier because they know they're paying their own taxes for their government instead of using class warfare to make those who work the hardest and are the most successful pay for their government.

www.nationalreview.com/nrof_comment/edwards200410070823.asp

"the corporate tax is a $200 billion hidden burden on Americans that kills jobs, causes Enron-style scandals, and has huge compliance costs. Replacing the revenues of the current corporate tax would require about a 3 percent VAT on a very broad base, or a higher rate on a narrower base."

Posted by: Al on November 1, 2007 at 1:03 PM | PERMALINK

VATs are a headache and a half to administer and what health care doesn't need is yet another administrative headache, especially a governmental one. Just let the damned Bush tax cuts expire. Congress doesn't even have to do anything. Those tax cuts are scheduled to expire and will expire with no further action on Congress' part necessary.

Using income tax (and closing the hedge-fund-compensation-as-capital-gain loophole) and estate tax can do it if Congress and a Democratic President had the necessary balls.

VAT's are inherently regressive, too, no matter how much food, etc., you exempt. The less wealthy one is, the greater proportion of income that MUST be spent on daily living.

Bad idea, Kevin, all round.

Posted by: Cal Gal on November 1, 2007 at 1:04 PM | PERMALINK

Now, Kevin. Let’s not go bashing all billionaires. Warren Buffett is complaining his taxes are too low! Buffett was outraged when he learned he was paying only 17.7% on income of $46 million, while his executive secretary, who makes only $60,000 a year, pays over 30%!

Posted by: The Conservative Deflator on November 1, 2007 at 1:04 PM | PERMALINK

I'am usually up for a gov't progam/incentive (or whatever you want to call it)to make a life a bit easier for people, but not this one...not this way. VAT is nothing more than a hidden tax...VAT is dumb, stupid, and just plain bad. You have to keep this kind of stuff out in the 'sunshine' But then I think that election day should be right after income tax time...

Posted by: quiltpox on November 1, 2007 at 1:05 PM | PERMALINK

Pardon my ignorance, but why wouldn't the majority of costs be covered under regular premiums like the current system? Have it provide a range of basic/emergency services for $500/month (or whatever). The economies of managing one giant risk pool on a non-profit basis should allow it to have a lower cost that for-profit providers. This assumes that a combination of gov't subsidies and excess premiums would be sufficient to provide reduced/free care to the poor. And such a system would allow people to select more expensive, gold plated insurance if they desire...

I guess my core question is why such a program would have to be paid for entirely from taxes like a VAT?

Posted by: kis on November 1, 2007 at 1:08 PM | PERMALINK

"the corporate income tax causes jobs to be killed and raises the cost of running a business."

Question: how many small businesses (which apparently create the most new jobs) are corporations and how many are sole proprietorships or partnerships?

The corporate income tax, IF it really raises the cost of running an entity, only raises the cost of running a corporation, not a business per se.

Posted by: Cal Gal on November 1, 2007 at 1:08 PM | PERMALINK

"Nerd: Because it would increase the income tax rate to dangerously high levels. A VAT is a more efficient revenue source, and it also puts our eggs in more baskets."

Ok, if taxation to pay for health care would raise income tax to too high of a level, then what would the VAT be? Perhaps I need a reference to the kind of VAT you're talking about but it seems that a tax on goods and services will be more regressive than a properly structured income tax.

Wouldn't a new type of tax introduce new burdens on businesses up and down the value chain?

Posted by: nerd on November 1, 2007 at 1:34 PM | PERMALINK

This is in addtion to state and local sales taxes?

Posted by: Edna on November 1, 2007 at 1:46 PM | PERMALINK

Any restructuring of the health care "system" has to account for the huge pile of money employers currently pay for private health insurance and that workers accept as part of their compensation in the form of an employee benefit. If that money is absorbed into this VAT or some other tax to fund the new system, or is paid directly to the employees who then fork it over to the government as VAT or other tax, it might be OK. If it just goes to line the pockets of corporate executives, leaving the workers to pay the new health tax out of their current earnings, it would suck big time.

Posted by: AJ on November 1, 2007 at 2:14 PM | PERMALINK

"Most VATs exclude some items in order to keep the hit on the poor low. If you exclude food and housing from the VAT, for example, a VAT is relatively progressive. (Not as much as a progressive income tax, but not too bad either.)"

Relatively compared to what?

The absolute best you could hope for with such a plan is that it would end up being somewhat progressive at the very low end. At the top end the exemption of all financial investment would dominate and the tax would turn regressive quickly dwindling away to almost nothing for the rich.

Posted by: jefff on November 1, 2007 at 2:15 PM | PERMALINK

Keep this talk up. Don't get scared off by the all-tax-is-bad crowd. I would MUCH rather pay a sensible tax, whose rate is controlled by Congress, than the sky-rocketing premiums of the private insurance cartels, over whom I have zero say. I recognize the incongruity in those sentences, the absurd notion that Congress is more responsive than the market, but that's how screwed health care is. If the market doesn't like any of these ideas, then they should find answers before the public and American businesses raise a clamor louder than any insurance lobbyist. All I see coming from the industry and the right is a collective, disinterested shrug.

Posted by: yocoolz on November 1, 2007 at 2:24 PM | PERMALINK

I would like to be introduced to this family of four making $25000 a year that can afford another $1000 in taxes.

Posted by: KathyF on November 1, 2007 at 2:58 PM | PERMALINK

Any restructuring of the health care "system" has to account for the huge pile of money employers currently pay for private health insurance and that workers accept as part of their compensation in the form of an employee benefit.

and

I would like to be introduced to this family of four making $25000 a year that can afford another $1000 in taxes.

I'll re-ask the question... why would a Medicare-like universal program have to be funded entirely by taxes instead of just looking like another health-insurance option with a monthly premium?

Posted by: kis on November 1, 2007 at 3:04 PM | PERMALINK

Surveying the political leadership of America, I think one could make the assumption that if a VAT were created, it would be designed to be an extremely regressive form of taxation. One need only look at the Billionators' rampage to keep from paying income taxes and its effect on so-called Democrats to realize a VAT would not, could not, be progressively designed in America.

Posted by: Brojo on November 1, 2007 at 3:08 PM | PERMALINK

You could pay for Social Security, unemployment, and all health care for a VAT of less than 20%. That would get rid of payroll taxes -- a trade most small businesses would be happy to make.

Posted by: freelunch on November 1, 2007 at 3:56 PM | PERMALINK

"I'll re-ask the question... why would a Medicare-like universal program have to be funded entirely by taxes instead of just looking like another health-insurance option with a monthly premium?"

What is the difference between a universal $500 a month premium and a universal $500 a month tax?

The only one I can think of is that a "premium" like that might be easier to market as opposed to such an extremely regressive tax despite the fact that it is a distinction without a difference.

Posted by: jefff on November 1, 2007 at 4:01 PM | PERMALINK

The only one I can think of is that a "premium" like that might be easier to market as opposed to such an extremely regressive tax despite the fact that it is a distinction without a difference.

Agreed - it would be easier to market alongside existing insurance options. As all the free market republicans are fond of saying - Let the market decide. If a universal program cant do it more cost effectively than private insurers, then they have nothing to fear.


Posted by: kis on November 1, 2007 at 6:10 PM | PERMALINK

I've never understood the opposition of NFIB and The Chamber of Commerce to sensible safety net sort of legislation. If they are really supposed to be the lobbying in the interests of their membership, it's just a ridiculous stance. The lack of these things is a tremendous hindrance to entrepreneurship. It's very hard to go out on your own and start a business if you have a family or any health history of your own to worry about. And for existing small businesses, it has to be quite hard to compete for the best employees when they aren't in the position to offer the same kind of benefits as the big boys. Taking that issue out of the equation would level the playing field. Only an incredibly blinkered and shortsighted ideological view of taxation and government regulation of the economy could fail to realize this.

Oh.

Of course the Dems get some blame here too. They don't often go out of their way to shield small businesses from the disproportionate effects of workplace regulation and taxation on small scale operations. Up-front costs and requirements that can be easily absorbed by large corporations can often do in small businesses, and that raises a lot of animus against government at the grassroots entrepreneurial level. But then when the lobby is so vituperatively anti-liberal, what do they expect?

Chicken and egg problems there, but I wish we'd give an olive branch and try to do right by small business owners. They seem like a logical constituency for us as against the Wal-Martification that an unregulated economy has wrought, but it just never seems to work out for some reason.

Posted by: J. Dunn on November 1, 2007 at 8:13 PM | PERMALINK

I believe that poster "AJ" brought up a very important point: most people are already paying a very large percentage of their income on insurance premiums (I know of some who are paying almost 50%). So, when a national health system is established the need is to ensure that employers and employees share the burden.
The simplest way to do that is to fund a national health system by increasing the Medicare deduction; an increase in those rates would still be less than the present premiums paid by employers and employees.
While business's would pay a smaller amount of their income in Medicare taxes as opposed to present-day medical insurance premiums, they would lose the write-off on the their part of the premiums (I don't believe Medicare "contributions" are deductible, but I could be mistaken). The result would be that business income would be increased by the amount of the former medical premiums (formerly tax-deductible), decreased by the (smaller) amount of increased Medicare payments (not deductible) and (possibly) decreased by a slightly higher tax bill. Even then, any increase in tax liability would most likely still bring total operating costs in at less than before.
And, after stopping the deduction for medical premiums, even a doubling of the present Medicare tax rate would leave most employees financially ahead. (There's all those pay raises they never got!)
Medicare taxes are already being collected, there is no need to add another tax.
Sorry, Kevin.

Posted by: Doug on November 1, 2007 at 8:24 PM | PERMALINK

I'm pretty sure this is exactly how the Canadians pay for their health care. In Nova Scotia, there's a 14% HST (6 to federal, 8 to province), that is added to everthying but food, rent, child care, and some other misc items, and applies to all but the smallest businesses (less than $30,000 per annum)
This tax is addition to property and income taxes that, at least in Nova Scotia, are more or less at the same level as the states I have lived in (HI and VA). (I have no idea how the federal level of taxation differs)

Posted by: Kenny on November 1, 2007 at 8:55 PM | PERMALINK

On Nova scotia, having looked up the numbers for FY07, here and here, it looks like I wasn't correct with my above post. It appears the sales tax brings in about $1.1 billion, and a tobacco tax brings in about $165 million. The total health care budget is about $2.7 billion. About half of the amount looks like it goes to direct payment of emergency care, drugs, and other medical services, the other half goes to district health authorities, (which look like local, provinicial run HMO's)

Posted by: Kenny on November 1, 2007 at 9:11 PM | PERMALINK

Something like a VAT was proposed this year in Illinois as the mechanism for funding a health care plan. The state Chamber of Commerce and the Illinois Press Association were virulently (good word) opposed to it. It sank like a stone.

I would expect the US Chamber to bring all their considerable might to bear against a VAT to fund
health care policy reforms. They know full well how easy it will be to reframe the debate with this "destructive" new tax as the central issue, pushing the health care question into a dark corner where it will die of neglect.

Posted by: Swampy on November 1, 2007 at 9:32 PM | PERMALINK

I am for national health care (with certain bells and whistles). However the funding of such a thing with a VAT sounds like a bad idea.

It has always been my impressions (from classes on taxation) that VATs are extremely hard to administer, lead to a lot of waste and are actually widely ignored. I think Italy uses one, and they have compliance rates way, way below other industrialized countries (that is meant as an example, not proof). That has been my sense from people who care a lot about taxation.

It seems to me that a simple progressive income tax is the best way to guarantee progressivity, transparancy, etc. Plus it is much easier to administer.

I am no expert, but I guess my knowledge of VATs differs substantially from Kevin's (if I may call hiim that), because I was always under the impression that they were quite inefficient,k and not particularly progressive.

Posted by: Doug on November 2, 2007 at 4:07 AM | PERMALINK

I think the VAT is a good way of properly funding a universal healthcare system, but anyone proposing such a large tax would be severely beaten about the head and shoulders, politically.

I think there is a chance for pay or play if the Democrats are willing to accept a smaller tax increase when the tax cuts are rolled back. I think this si a compromise that could get 60 votes. Pay or play is more important then a tax cut rollback because without such a mechanism, there is simply too much incentive for businesses to drop coverage.

Posted by: j on November 2, 2007 at 11:14 AM | PERMALINK

Someone needs to speak up for lower-income payers and patients. That is why I am working to support AARP which is trying to make sure all voices are heard. Go to their website at http://www.thisissoridiculous.com! There you can interact with congress and donate!

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