I’m very pleased to read Lori Montgomery’s story in today’s Washington Post, highlighting Len Burman’s idea to fund health care reform through a major reform of the U.S. tax system. The centerpiece of Len’s tax reform proposal is a new national value-added tax (VAT):
“Everybody who understands our long-term budget problems understands we’re going to need a new source of revenue, and a VAT is an obvious candidate,” said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. “It’s common to the rest of the world, and we don’t have it.”…
And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent.
In that paper, Len explains that the VAT would do more than pay for universal health care; the health care voucher system it would fund would contain cost controls (limits on what the vouchers could buy), which along with elimination of the health care tax exclusion would reduce overall health care spending. Len estimates that the new VAT would thus do more than just fund health care reform, it would free up a lot of the current claims on the income tax system:
All told, the income tax would have to finance about $450 billion less in health spending than it does at present. In addition, there would no longer be a tax exclusion for employer-sponsored insurance (ESI), a $168 billion income tax expenditure in 2009…Thus, the income tax base would become substantially larger.
Why is that larger income-tax base such great news? Because it means that income tax rates could be cut and/or the deficit could be reduced. Those sound like two “winner” ideas: lower tax rates now, for us, or lower tax rates (and a stronger, more sustainable economy) later, for our kids and grandkids.
So when Len concludes in his paper that his proposal faces a lot of challenges, because “there is the reluctance of politicians to do anything that creates winners and losers” and that “[t]ax reform and health reform will both lead to that result”, I think he sells his idea short, neglecting the beauty of his combining tax reform with health reform in the way he’s done. The public and politicians don’t like the idea of tax reform when any revenue neutrality, or especially the revenue-gaining side of that revenue neutrality, is obvious. The Tax Reform Act of 1986 was revenue neutral, involving losers as well as winners, and yet passed largely because the public and the politicians didn’t focus so much on the losers, because the proposal raised revenue from corporations and lost revenue collected from households (i.e., gave tax cuts to them). (Most non-economists don’t get the notion that corporations don’t ultimately pay the corporate income tax–actual people do, whether they be consumers, workers, shareholders, etc.) Similarly, I think that a proposal for a new tax (such as a VAT) will go over much better if it immediately buys something perceived as a really good thing–such as universal health care. People won’t think of it so much as a nasty fundamental tax reform effort that would inflict pain on those very people (politicians included) who most enjoy the current income tax system and all its inefficiencies, just the way it is. (Len makes the point that fundamental tax reform will go nowhere anytime soon unless it hitches a ride on the health reform train.) And if the new VAT buys even more than that, allowing income tax rates to be cut and the deficit to be reduced, then even if there are some truly hard choices (such as cost controls and reduced tax subsidies) wrapped up in that attractive package, I think it could look like an overall winner.
I think Len’s really onto something here.