Editore"s Note
Tilting at Windmills

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November 2, 2007
By: Kevin Drum

MORE VAT....Matt Yglesias adds his voice to the tsunami of blogospheric support for a VAT to pay for universal healthcare, and then says:

All-in-all, I think this is an area where progressive politicians are going to need to figure out a way to get over their taxophobia. The sort of things liberals want to see happen require money, and that's a real political problem. Trying to get around the need to raise this money through taxes — using various kinds of regulatory mandates and "fees" — may work pretty well when you're only talking about a small amount of money, but when big bucks come into play it's probably worth coming up with something straightforward, efficient, and comprehensible and just having the fight.

I agree, but this actually demonstrates one of the problems with a VAT: it's a brand new tax, not just an increase in an old tax, and it isn't remotely politically feasible to create a new tax unless it's being used to raise a considerable amount of money for a big new program. This in turn means that it only really makes sense if it's being used to fund a genuine, single-payerish national healthcare program.

But of course, that's not what's on offer right now, and it's increasingly looking like that's not how we'll ever get universal healthcare. What we'll get instead is a bunch of small, incremental steps that, over time, will add up to something that's close to a universal program. The funding will be kludged together at each step of the way, so 20 years from now we'll have a universal system cobbled together from a bunch of little initiatives mated with funding that's likewise jury-rigged from a wide variety of minuscule incremental tax measures.

Which is too bad, since other countries have enough experience with this kind of thing that it's quite possible to design a reasonably sensible program that gets the funding, the coverage, the cost controls, and the administrative apparatus pretty close to correct in a single try. Won't happen, though, and no one will take on the risk of advocating for a VAT for the sake of funding some minor add-on to our current system.

So, anyway, that's the downside of a VAT: it only makes sense if you have the political courage and will to pass a big new universal healthcare system in the first place. That doesn't look very likely from where I sit.

On the other hand, there's one criticism of a VAT (mostly from conservatives) that I've never understood: the charge that it's a "stealth tax." Liberal I may be, but I'm opposed to invisible taxes too. I think people should know how much they're paying in taxes (this is a democracy, after all), and that this acts as a salutary brake on government inefficiency. But why is a VAT a stealth tax? Some of it is payed directly by businesses, which means the business community is well aware of it, and some of it is paid at the final point of purchase, which means consumers are aware of it. In Canada and Europe, I've never met anyone who didn't know exactly what the current VAT rate was, and who didn't complain about it loudly given half a chance. If a VAT is stealthy, so is the U.S. Marine Corps.

Kevin Drum 12:32 PM Permalink | Trackbacks | Comments (29)

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But why is a VAT a stealth tax?

For the same reasons some conservatives think the SS&Med contributions are "stealth taxes." People just get used to them and don't "see" them because they are there, hiding in plain sight. The most frequent proponent of this theory is Neal Boortz who likes to rant that people don't know how much money they make, they only know their take home pay.

Posted by: Martin on November 2, 2007 at 12:38 PM | PERMALINK

Unfortunately, a VAT would also fall disproportionately on the poor.

One thing that could be done -- go back to that lovely tax scale that Eisenhower used for his nation building, and tag that money for wars and nationbuilding.

Yes, it's 90% tax on all money over 400,000 -- I suppose that could go up to a million or 2 in light of inflation, but it really would do something to level the burden of taxes. Poor folks spend everything they make. So do the middle classes, anymore. So let's extend the privilege to everyone!

Posted by: Scorpio on November 2, 2007 at 12:38 PM | PERMALINK

I think conservatives call it a stealth tax because of the nefarious European habit of listing the actual price you will pay for an item, rather than listing that irrelevant but seductively low pre-sales-tax sum of money which is not the amount you will actually pay, as we do in the good ol' USA.

Posted by: brooksfoe on November 2, 2007 at 12:44 PM | PERMALINK

Kevin Drum,

Yesterday in comments:

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

Kevin Drum: Because it would increase the income tax rate to dangerously high levels.

What levels would be "dangerously high"? How would they be "dangerous"? How did you come to this conclusion?

Kevin Drum: A VAT is a more efficient revenue source

How is it more efficient? It would require the creation of an entire new tax bureaucracy, and for businesses to track it. The overhead for VAT accounting, on both the government and business side, is substantial.

Posted by: alex on November 2, 2007 at 12:46 PM | PERMALINK

What evidence do you have that the overhead on VAT is substantial? It looks like the world's most easily calculable tax.

Anyway, with savings rates below zero, we could really use a tax that discourages spending, rather than one that discourages earning. We could rejigger the EITC to compensate for regressivity.

Posted by: brooksfoe on November 2, 2007 at 12:53 PM | PERMALINK

So, anyway, that's the downside of a VAT: it only makes sense if you have the political courage and will to pass a big new universal healthcare system in the first place. That doesn't look very likely from where I sit.
^^^

Spot on-exactly. You can't sell a brand new tax unless it is a major comprehensive single-payer overhaul. We are going to end up doing UHC incrementally, so it would be easiest simply to incrementally expand Medicare like you mentioned the other day by bringing in the youngest people. But I would also simultaneously start lowering the eligible age (first drop it to 55). You need to maintain an incentive for companies to hire older workers. The main disincentive now is their health costs.

Posted by: Doc at the Radar Station on November 2, 2007 at 1:07 PM | PERMALINK

Is someone saying that VAT tax is a good way to pay for health care spending, but not a good way to pay for some other federal spending? I don't see the point in tying these issues together. VAT tax either is or is not the best way to increase tax revenue. If I'm missing something, I hope someone will explain.

Posted by: Gary Sugar on November 2, 2007 at 1:16 PM | PERMALINK

I have lived in two countries with VAT, and can tell you it is a regressive tax that is incredibly painful, causes inflation and stifles the economy(yes, even I the great liberal can acknowledge). I support universal healthcare, but this is not the way to finance it.

Posted by: mo-lama on November 2, 2007 at 1:26 PM | PERMALINK

A tax on adding value to something assumes that value add will have a corresponding revenue generating aspect in the market place. What if it does not? A VAT is an intangible expense to adding value, which would reduce the incentive to add value to something. A VAT has no value as an input. It adds nothing to whatever product is being produced. A VAT reduces the value of producing goods and services and is collected before any revenue from the value add can be made. How can new producers afford this intangible expense prior to earning revenue?

A VAT is a way for large corporations to limit market entry by new competitors. It is doubtful new industries and businesses, like the Silicon Valley achievement, would have come into existence had a VAT regime been in place.

Posted by: Brojo on November 2, 2007 at 1:31 PM | PERMALINK

As above. A VAT is regressive. Heavily so.

Posted by: Tim Worstall on November 2, 2007 at 1:36 PM | PERMALINK

it isn't worthwhile to create [a new tax] unless it's being used to raise a considerable amount of money for a big new program. (Kevin)

I don't understand this. Suppose I could get a better-paying job. It wouldn't be worthwhile to take the new job unless I'm planning to spend the raise on something in particular? How does that make sense?

Posted by: Gary Sugar on November 2, 2007 at 1:37 PM | PERMALINK

VAT is less regressive than payroll taxes. Trade payroll taxes for VAT and pay for social insurance programs: Medicare for all, old age, survivors, disability, and unemployment (maybe even worker's compensation). If you don't like that VAT is not progressive, give a rebate to those with low income or use the EITC as the mechanism for making the Federal tax system _in general_ more progressive.

Posted by: freelunch on November 2, 2007 at 1:44 PM | PERMALINK

Query: What is the advantage of a VAT over a straight sales tax?

Posted by: Gar Lipow on November 2, 2007 at 2:13 PM | PERMALINK

I just don't get the argument for VAT. It basically strikes me as nigh crazy, requiring modifications and adjustments to people's points of view that are completely unnecessary.

Here's what currently happens in most paychecks. There's an individual payroll contribution for SS and Medicare, individual income tax, and individual contribution toward health care insurance.

I'd expect that in a new-fangled Medicare-for-All system, what you'd see is just about the same entries, except that now the individual contribution for health care insurance would be supplanted by a new one toward Medicare-for-All. The number would be higher, because it would include also the employer contribution, but the take home amount would be roughly the same, because, as has long been argued, it's not actually more expensive to use Medicare-for-All than it is to pay off our absurd health insurance industry. Perhaps, to cover everyone via Medicare-for-All, it will require a slight bit more from employed people -- or perhaps not, depending on how much efficiency it would introduce.

Now, please, could someone -- Kevin would be a good choice -- explain to me why this wouldn't work? If no one can, then why even think about the madness of introducing an entirely new major category of tax with the opportunities for demonization and end-of-the-world talk that that would inspire.

Posted by: frankly0 on November 2, 2007 at 2:31 PM | PERMALINK

Gar Lipow: What is the advantage of a VAT over a straight sales tax?

It's harder to evade. "Straight" sales tax is paid only on retail (final consumer) sales. If the seller can get away w/ not reporting the sale, he can sell without collecting it (or pocket it).

VAT is collected at every step in the chain of production. So if a landscaper sells you his services, he'll have paid VAT on the fertilizer he puts on your lawn. Therefore he has an incentive to charge you VAT in order pay for the VAT he paid.

See also http://en.wikipedia.org/wiki/VAT#Comparison_with_a_sales_tax

Posted by: alex on November 2, 2007 at 2:36 PM | PERMALINK

Here's the difference between a "tax" used to pay for Medicare-for-All and a tax introduced to cover something brand new -- such as SS or Medicare itself once upon a time: we are ALREADY paying for the service in question in the case of national health insurance -- just pay it to private entities (who are inefficient) instead of to a governmental entity.

In principle, we should be able to keep the payments at basically the same level (with minor modifications to create more equitable distribution of pain) and maintain the same level of service, right? So why not simply redirect the payments currently being paid out? Isn't that the most painless way of achieving the proper effect?

Posted by: frankly0 on November 2, 2007 at 2:46 PM | PERMALINK

We don't need a new "tax" to pay for universal healthcare, we need a premium. Make the premium amount dependent on the individual's (or family's) ability to pay. If I'm currently paying $220/month for family premium, I have no problem paying 2/3 of that for a universale system.

Posted by: MeLoseBrain? on November 2, 2007 at 2:49 PM | PERMALINK

MeLoseBrain?: We don't need a new "tax" to pay for universal healthcare, we need a premium. Make the premium amount dependent on the individual's (or family's) ability to pay.

You can call a mandatory payment to the government a premium if you like, but in plain English it's a tax. Basing it on your ability to pay makes it like almost every other tax is (or should be anyway).

Since nobody likes paying taxes, it's best to remind them that they'll be paying it in lieu of premiums. Save the newspeak for the Republicans.

Posted by: alex on November 2, 2007 at 3:01 PM | PERMALINK

Since nobody likes paying taxes

Oh, that's what y'all mean. You mean a VAT tax in addition to existing taxes would be hard to sell because higher taxes is hard to sell. So what does proposing new spending on health care or anything have to do with that? If you think VAT taxes are better than income taxes, you should propose trading VAT taxes for income taxes.

Posted by: Gary Sugar on November 2, 2007 at 3:34 PM | PERMALINK

You can call a mandatory payment to the government a premium if you like, but in plain English it's a tax.

I think people could (more) easily understand the idea that the premium they used to pay for private insurance is now going to public insurance. In fact, even better, let them keep their private insurance if they want, or else choose the public option from their cafeteria of health plan choices. If run correctly, the public plan should be cheaper.

Structuring universal care on a tax, especially a new tax, will just doom it. Especially for those who might like to keep their current private plan and opt out of universal care - they will end up paying twice (once in taxes, once in premiums).

Posted by: kis on November 2, 2007 at 3:46 PM | PERMALINK

I really don't think most people care a whole lot about whether a payroll deduction is a "tax" or a "premium". A deduction is a deduction.

People mainly care about the NET income they receive in that paycheck.

The important thing is not to disturb too much that net income.

Posted by: frankly0 on November 2, 2007 at 3:49 PM | PERMALINK

frankly0: I really don't think most people care a whole lot about whether a payroll deduction is a "tax" or a "premium". A deduction is a deduction.

You're right, and they're right for viewing it that way. At least using English instead of newspeak won't hurt.

The important thing is not to disturb too much that net income.

Which is why I think that UHC will have to be partly, or even largely, based on a payroll tax. Even with employee contributions, many employers still pay a big chunk of the premium. A payroll tax in lieu of a premium is the only way not to change people's take home too much.

Posted by: alex on November 2, 2007 at 4:03 PM | PERMALINK

All i want to know about niversal healthcare fnding is this:

My company and I combine to pay ~17K per annum for my insurance. let's assume that with a federally funded insurance program, I opt out of my benfits with my company, and they increase my pay by the 14K they give me now in insurance subsidies. Not a great assumption, i know, but for the sake of argument.

So I have 17K a year to pay. If the taxes won't exceed that amount, and my services are the same, why would I possibly be upset with it? and hey, if they can do it for cheaper (and honestly, how could they not if they wanted to) then hell yes get it going! I'll take the payroll tax. I'm paying it already for my private insurance. And if I have to pay double what most people pay (because, well, I make double what most do), I'm OK with that. Just keep it less than or equal to what my company and I pay now.

Posted by: Dan Isaacs on November 2, 2007 at 4:27 PM | PERMALINK

"So, anyway, that's the downside of a VAT: it only makes sense if you have the political courage and will to pass a big new universal healthcare system in the first place. That doesn't look very likely from where I sit."

Political courage? Aren't we talking about Congressional Democrats here? Of course it's unlikely. Congressional Democrats are afraid of their own shadows.

Posted by: nemo on November 2, 2007 at 4:59 PM | PERMALINK

I wonder if the traditional 80/20 employer/employee premium split would be maintained? I wouldn't be surprised if it ends up 65/35 to match the Health Care Tax Credit. Maybe that's why big business is getting interested in it. Also, it is obvious that the private system isn't able to hold down costs anyhow.

Posted by: Doc at the Radar Station on November 2, 2007 at 5:07 PM | PERMALINK

"In Canada and Europe, I've never met anyone who didn't know exactly what the current VAT rate was, and who didn't complain about it loudly given half a chance."
In Canada the GST (Goods and Services Tax, currently 6% due to be cut to 5%) is added on to prices afterward. So a chocolate bar will cost a buck and then they'll ring it up and say such-and-such with GST.

Posted by: Jacob on November 2, 2007 at 6:15 PM | PERMALINK

I don't understand why you'd say a 'straight sales tax' is only charged at the retailer.

Are you saying the only difference between a VAT and a 'straight sales tax' is the VAT is charged on every sale/purchase, regardless of whether it's retail or othewise?

Why would anyone want to pay an additional tax for the universal health care plan if we're also going to keep the private system?

Don't we want to just charge a premium for the government plan, same system as is used with the private plans? Set the premium as a percent of income or somesuch and let people choose whether to go for it or not.

One problem with our current tax system is that to a certain extent IT is invisible: it's taken out by the employer from every check. If you had to pay it at the cash register, the way you do a sales tax, the more you'd notice it.

I'd like to know what rates would be needed, to produce current fed. revenues, if we had one flat rate tax on income/interest and one big deduction for 'cost of living' (perhaps a lesser one for children). Would the rate be around 20%, 25%, 30% or what?

Posted by: MarkH on November 2, 2007 at 7:57 PM | PERMALINK

Doc at the Radar Station has pointed out the one way creating a NHS would fail: by starting the service from scratch and instituting a new tax to pay for it. Too many conservative Democrats would run screaming from any new tax and I imagine the Republican PR people are chortling right now at the thought of it.
If the incrementalist approach is the one adopted; then the simplest and most effective way to fund a NHS is to increase the Medicare tax rate. It could even be done in increments, just as the minimum wage is.
The only way to effectively gain enough, solid support for a NHS (and fight off the attack ads) is to keep the funding simple and understandable - an increase in Medicare rates (after a decrease due to no more medical premiums) will be easy to explain and hard to refute, although I'm sure the Health Insurance industry will try (boy, will they try!).
Personally, I just don't see anything to gain by trying to sell a new tax to fund the extension of an existing program when a tax is already in place.

Posted by: Doug on November 2, 2007 at 8:16 PM | PERMALINK

Doug, the "incrementalist" approach isn't the ideal way, it is just the most *pragmatic* way we can get UHC moving (and it has got to get MOVING sometime soon). It is best that you can straight away get the youngest people (0-21), and oldest workers (55-65) expanded into Medicare coverage and raise the Medicare payroll taxes accordingly to accommodate them. Then phase-in an "opt-in" to Medicare scheme with the remainder of 21-55 workers after we see how things go.

Posted by: Doc at the Radar Station on November 3, 2007 at 12:00 AM | PERMALINK




 

 

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