Improve Obamacare: Single-Payer (VAT) & Multiple Providers

In 2005, The New England Journal of Medicine published an article titled “Healthcare Vouchers, A Proposal for Universal Coverage” by Ezekiel Emanuel, MD, PhD and Victor Fuchs, PhD.  At the time, Dr. Emanuel was Chief of the Department of Bioethics at National Institutes of Health, and Dr. Fuchs was Professor of Economics and of Health Research and Policy at Stanford University.

(This proposal was updated and presented in detail in 2008 in a book: “Universal Healthcare, Guaranteed, A Simple Secure Solution for America,” Ezekiel J. Emanuel, Public Affairs, Jackson, TN.)

The Universal Healthcare, Guaranteed plan called for eliminating – for corporations – the direct burden of healthcare insurance, and providing healthcare vouchers to be used in a health insurance exchange that could also include Medicare.  The vouchers were to be funded by a dedicated Value Added Tax.  This method of funding the vouchers would have broad economic benefits.

The Value Added Tax is monetarily equivalent to a sales tax.  It differs in that VAT is added at each stage of production and distribution rather than only at the retail level.  Credits are taken for taxes paid at each stage, so the tax does not cascade (no taxes on taxes).  Unlike a retail sales tax, however, VAT is recognized under GATT rules (General Agreement on Tariffs and Trade) as a border-adjustable tax, i.e., subtracted from exports and added to imports.  This feature eliminates the burden of government expenditures from the price/value competition of goods and services crossing international borders.  Both domestically produced goods and imports are taxed the same.

The U.S. does not employ a VAT, which results in a competitive disadvantage in trade.  All our trading partners have a significant portion of taxes paid by VAT’s, so goods exported from those countries are coming in cheaper by the percentage VAT.  How much cheaper?  Cars from Germany, 17% cheaper.  Goods from China, 19% cheaper.  The Emanuel/Fuchs plan for healthcare vouchers would require a VAT of around 12% to cover everyone under 65 (with Medicare still covering those older). At 12%, the healthcare VAT percentage would be about the average percent of our trading partners’ VAT’s.  Imports would be equally burdened by the cost of U.S. healthcare, and our exports would no longer carry the cost of healthcare in their prices.  We could expect domestic production to be more competitive at home and abroad, fueling economic and job growth.  

The VAT would replace healthcare insurance provided by companies and individual insurance premiums.  Many corporations currently pay around 15% of wages for healthcare insurance premiums.  Ford Motor Company, for example, spends more for healthcare premiums than it does for the steel in its cars.  Again, companies would be freed of this direct insurance cost. 

But would the burden of the VAT be fairly distributed?  Some companies would increase wages to assist employees, and competition suggests those who did not would not attract the best workers.  Health insurance by companies became a method of competition in the marketplace for employees when wages were frozen during World War II, and companies added to this benefit to remain competitive.  Government, too, could assist with VAT payments through the EITC (subsidy to the poor and lower wage earners).

Emanuel and Fuchs addressed that question: “Some people reflexively reject a value-added tax as regressive. However, the distributional impact of the voucher proposal requires looking at the benefits as well as the tax burden. All things considered, the program is progressive, since it implicitly subsidizes the poor. It is not an accident that countries such as Norway and Sweden, which provide universal health coverage, make substantial use of value added taxes to fund social programs.” 

There is resentment in some quarters about the expensive cost of free services in hospital emergency rooms and obstetrics units.  But, with a VAT paying for healthcare benefits, everyone would be contributing towards these benefits.  And, since wealthier consumers purchase more goods and services, they would be paying for a greater proportion of the VAT receipts, adding to progressivity.  Furthermore, because the VAT would be dedicated to healthcare vouchers, the public would have a visual check on the cost of demanding more medical services, and, perhaps, be somewhat self-limiting.

So, why didn’t Congress embrace the Emanuel/Fuchs plan?  Republicans have been wary of introducing another tax base that would be used as a money machine for bigger government. Some Democrats fear VAT would be too regressive.  Larry Summers put it this way: “The reason the U.S. doesn’t have a VAT is because liberals think it’s regressive and conservatives think it’s a money machine. We’ll get a VAT when they reverse their positions.” 

The Affordable Care Act will educate the public on the use of healthcare exchanges.  A smart Congress would do well to explore a dedicated Value Added Tax to fund healthcare vouchers used in the insurance exchanges.

(See the 9-minute video to learn how VAT would grow the economy and jobs – including a clear explanation by Bill Clinton)

Simpson-Bowles and a Smarter Tax System to Spur Growth

Sen. Alan Simpson and Erskine Bowles have released their newly revised plan for curbing the deficit and reducing the debt.  Included in the plan is a call for $600 billion in increased tax revenues to be accomplished by reducing deductions for corporate and individuals while reducing tax rates.

In calling for this approach to tax reform, Simpson-Bowles takes aim at our bloated, inefficient tax system:

Reform the Tax Code in a Progressive and Pro-Growth Manner. The current tax code is complicated, confusing, costly, anti-growth, anti-competitive, unfair, and riddled with well over $1 trillion of tax expenditures – which really are just spending by another name. Tax reform must reduce the size and number of tax expenditures to reduce the budget deficit and lower marginal tax rates for individuals and corporations. At the same time, tax reforms must maintain or improve the progressivity in the tax code and promote economic growth. Tax reform will make the tax code more efficient, effective, and globally competitive.”

The last goal, to create a “globally competitive” tax system cannot be overemphasized.  In this era of globalization, the U.S. remains at a major competitive trade disadvantage by virtue of its tax system.  Eliminating this disadvantage is the prime key to growth that government policy could provide.

According to the new Census Bureau report, the 2012 U.S. trade deficit dropped nearly $20 billion to $540 billion, mostly due to a decrease in expenditures for foreign oil.  But, our manufacturing trade deficit reached a record deficit of $684.5 billion, an increase of 7%.

The goods deficit with China increased $20 billion, to $315 billion from $295 billion, accounting for 58% of the imbalance. U.S. exports to China increased $6.7 billion (primarily soybeans and civilian aircraft, engines, equipment, and parts) to $110.6 billion, but imports increased $26.3 billion (primarily cell phones and other household goods) to $425.6 billion.

The goods deficit with European Union increased from $99.9 billion in 2011 to $115.7 billion in 2012.  Exports decreased $3.3 billion (primarily non-monetary gold and petroleum products) to $265.1 billion, while imports increased $12.5 billion (primarily passenger cars, civilian aircraft engines, and petroleum products) to $380.8 billion.

Achieving Growth through Tax Policy.  The most positive reform to stimulate growth in exports, domestic production and jobs would be to replace the Corporate Income Tax with a Value Added Tax.  VAT is now utilized by all our trading partners and over 150 countries to exclude the cost of government from the price/value relationship of goods and services in international trade.  By definition under GATT rules, unlike corporate income taxes, the VAT is border-adjusted, i.e., subtracted from exports and added to imports. Without a VAT of our own, imports have a decided price advantage, and our exports carry a price disadvantage.

Replacing the CIT by a VAT would eliminate the double-taxation of dividends, encourage the return of multi-national profits now parked in countries with lower corporate tax rates, and stimulate foreign investment here.  Imports would carry an equal burden, so American goods would become more competitive at home and abroad.  An additional consideration to stimulate jobs would be to replace the corporate contribution to FICA by the VAT to reduce a direct disincentive cost to employment.

Governor Mitch Daniels, echoing Herman Kahn of Hudson Institute, once suggested that replacing our current tax system by a VAT coupled with an individual income tax with a high threshold would produce a tax system that is fair, competitive, and stimulative for growth.  And, with zero tax preferences (no exclusions and deductions), gone would be the corrupting lobbying for loopholes, once and for all.

Barro, Josh, “Soak the Old? Why a VAT Is Distributionally Fair, Forbes.com, 05/03/12

“I have three responses to the regressivity complaint. The first is that a VAT is regressive, but not as regressive as commonly thought. Part of the reason that a VAT appears regressive is that it is paid at the time of consumption, so it appears that savers are avoiding the VAT. In fact, saving only delays your VAT burden; savers accrue tax liabilities that are payable at the time of consumption…

…(T)he Tax Policy Center shows how a VAT burden is distributed when taking account of the fact that a VAT burden attaches itself to investments, even if it is not paid in the current period. They find that a 5 percent VAT with a comprehensive base costs 5.7 percent of income for those in the bottom quintile and 4.3 percent for those in the top quintile.

Secondly, VAT is just one component of the overall tax code. The regressivity of the VAT can, and should, be offset in part by greater progressivity in other areas of the code. Some of the proceeds of a substantial VAT should go toward progressive cuts in the payroll tax or policies that exclude a significantly larger share of households from the personal income tax. Expanding the Earned Income Tax Credit would be another possibility.

Third, the tax code should get more regressive as government spending rises as a share of GDP. Regressive taxes tend to be more efficient taxes, and efficiency in tax collection becomes more important as the government needs to collect more revenue. The rising tax share of GDP also partly reflects increased spending on means-tested entitlements, which is progressive. Even financing such programs with regressive taxes is progressive on net.

The transition complaint is that introducing a new VAT amounts to a one-time tax on existing assets. Think of it this way. Imagine that a country used to have only one tax, an income tax, and then abolished it in favor of a VAT. The taxes might have the same rate, but a person who had saved lots of money would end up paying twice: income tax at the time he earned and saved, and then VAT when he finally spent.

In a vacuum, this would indeed be an important equity concern with the VAT. But we are not in a vacuum. Instead, we are in a situation where people in retirement are claiming entitlement benefits whose cost now far outstrips their dedicated revenue sources. Today’s retirees got a great deal, working when payroll taxes were low and collecting benefits whose costs are high. And the political consensus is that they are untouchable: Social Security and Medicare will have to be fixed by the young paying higher taxes and taking benefit cuts.”

 http://www.forbes.com/sites/joshbarro/2012/05/03/soak-the-old-why-a-vat-is-distributionally-fair/

 

NYTimes: Flat Tax Doesn’t Solve Inequity Problem, Robert H. Frank in “The Problem with Flat-Tax Fever,” 11/06/11

Robert Frank attacks the Flat Tax as inequitable and as a mirage to solving the problem of complexity.  But, the Perry incarnation is only the latest, but not the purest presentation of the Flat Tax.  The complexity resides in the retention of various deductions (loopholes), which in the ideal are eliminated in their entirety.  Mr. Frank does not discuss the simplification potential, but concludes his piece with a brief submission of his preference for a progressive consumption tax.  There is no acknowledgment, however, that his preferred tax would also favor the highest earners, as they have the most disposable income and therefore the very disproportionate ability to save.  Most economists would agree that increased savings are important to our economic success, but there is no discussion of this in the column.

Unfortunately, Mr. Frank’s unarguable conclusion is that our politicians are most unlikely to approve a new tax, backed-up by the fact that half the members of the Debt Commission (“supercommittee”) have pledged not to do so.

Mr. Romney and President Obama have yet to declare one way or the other on sweeping tax reform, but the possibility remains, in spite of the pledges taken by members of Congress and Senators, that either might propose a new and different plan.  The cleanest, most competitive system for replacement of our outmoded and corrupted tax code would be a clean sweep replacement by a VAT and a FlatTax on personal income with a high threshold.  The tax could be balanced between the VAT and Personal Income Tax, so as to retain (increase) progressivity, and the bottom quintiles could be protected from the VAT via the Earned Income Tax Credit.  The border-adjustable VAT would make exports more competitive and imports less so.  Such a plan was once floated by Gov. Mitch Daniels, but has not reached the light of day without a champion in the presidential campaign.

 

Graetz, Michael J., Professor of Law, Columbia Law School, Statement At a Hearing of the House Ways and Means Committee on Tax Reform and Consumption-Based Tax Systems, July 26, 2011

“…It is the central contention of my book, and the centerpiece of my proposal, that the fundamental reform required to create an internationally competitive, administratively efficient, and viable long-term solution to our funding requirements is to make a different choice.  We should eliminate the income tax for the overwhelming majority of Americans and replace it with a broad-based tax on sales of goods and services. We should return the income tax to its original, manageable purpose: the collection of a simpler tax on high-income earners who tend to have multiple income sources. And we should dramatically lower our corporate income tax rate. In order to do that, we need to tax consumption, sales of goods and services.”…

“…For those unfamiliar with my Competitive Tax plan, it has four key pieces:

• First, enact a value added tax – a broad based tax on sales of goods and services now used by more than 150 countries worldwide.  We are the only OECD country that does not have a VAT or, as it is sometimes called, a goods and services tax.

 • Second, use the revenues produced by that consumption tax to finance an income tax exemption of $100,000 of family income and to lower substantially the individual income tax rate on income above that amount.

 • Third, lower the corporate income tax rate to 15%, or at most 20%.

 • Fourth, replace the earned income tax credit and provide low and middle income families with tax relief from the VAT burden through payroll tax offsets and debit cards….”

 “…Opponents of value-added taxes often complain that they are regressive, and if such a sales tax were to fully replace our income tax, as proponents of the so-called Fairtax urge, tax burdens would indeed be shifted down the income scale.  So I designed my Competitive Tax Plan in a manner generally to change neither the progressivity of the tax system nor the amount of revenue produced under current law.  This allows my proposal to be evaluated by comparing it directly to the current system, and it follows the important precedent of both distributional and revenue neutrality that facilitated enactment of the 1986 Tax Reform Act, our last major tax reform…”

“…A great advantage of my Competitive Tax plan is that, by introducing a border-adjustable value added tax on sales of goods and services and thereby decreasing our nation’s need to rely so heavily on the income tax to finance our government’s spending, we can have a tax system that is fair and yet substantially more favorable to economic growth than our current system…”

 http://waysandmeans.house.gov/UploadedFiles/Graetz_Testimony.pdf

Gale, William G. & Benjamin H. Harris, “A Value-Added Tax for the United States: Part of the Solution,” Brookings Institution and Tax Policy Center, 07/2010

“The IMF (2010) estimates that, in advanced economies, an increase of 10 percentage points in the initial debt/GDP ratio reduces future GDP growth rates by 0.15 percentage points. Hence, the projected increase in the debt/GDP ratio from about 40 percent earlier in the decade to 90 percent by 2020 (Auerbach and Gale 2010) would be expected to reduce the growth rate by a whopping 0.75 percentage points. By cutting deficits, the VAT would help spur economic growth.”      (Pg. 5)


“Concerns about the regressivity of the VAT are complex, but they should not obstruct the creation of a VAT for two reasons.  First, while we accept the validity of distributional considerations, what matters is the progressivity of the overall tax and transfer system, not the distribution of any individual component of that system. Clearly, the VAT can be one component of a progressive system.

Second, it is straightforward to introduce policies that can offset the impact of the VAT on low-income households. The most efficient way to do this is simply to provide households either refundable income tax credits or outright payments. For example, if the VAT rate were 10 percent, a $3,000 demogrant would equal VAT paid on the first $30,000 of a household’s consumption. Households that spent exactly $30,000 on consumption would pay no net tax. Those that spent less on consumption would receive a net subsidy. Those that spent more on consumption would, on net, pay a 10 percent VAT only on their purchases above $30,000. Toder and Rosenberg (2010) estimate that a VAT coupled with a fixed payment to families is generally progressive, even with respect to current income.
In contrast, many OECD governments and state government offer preferential or zero rates on certain items like health care or food to increase progressivity. This approach is largely ineffective because the products in question are consumed in greater quantities by middle-income and wealthy taxpayers than by low-income households. Furthermore, this approach creates complexity and invites tax avoidance as consumers try to substitute between tax-preferred and fully-taxable goods and policymakers struggle to characterize goods (for example, if clothing were exempt from the VAT, Halloween costumes classified as clothing would be exempt while costumes classified as toys would not).”   (Pg. 7)

“The Canadian VAT.  In 1991, Canada implemented a 7 percent VAT at the national level to replace a tax on sales by manufacturers. Many of the concerns associated with the VAT in the United States can be assuaged by observing the Canadian experience.

Canada addressed distributional concerns by applying a zero rate to certain necessities and adding a refundable tax credit in the income tax. As noted above, we prefer the latter method. The Canadian VAT is completely transparent: it is listed separately on receipts just like sales taxes in the U.S. Perhaps because of the transparency, the VAT has not led to significant growth of government spending. Federal spending in Canada has in fact gradually declined from 22.6 percent of GDP in 1991—when the VAT was implemented—to 14.9 percent in 2009. The standard VAT rate has declined over time to 6 percent in 2006 and 5 percent in 2008. Federal tax revenue in Canada has fallen from 17.6 percent of GDP in 1991 to 16.3 percent of GDP in 2007 (and fell further to 14.6 percent during the 2009 recession). In terms of both revenues and expenditures, the size of the Canadian federal government has shrunk significantly since the introduction of the VAT. Since 1991, Canadian inflation and economic growth rates have been similar to those in the United States.”  (Pg. 11)

“An American VAT.  The structure of an American VAT should include:
– a very broad base;
– rebates or income tax credits (rather than product exemptions) to achieve progressivity;
– efforts to raise transparency (for example, having VAT listed separately on receipts); and
– explicit links to spending discipline.

While we are not wedded to a particular rate, we do note that a 10 percent VAT with a broad base could raise about 2 percent of GDP in revenues, even after netting out the offsetting adjustments in other taxes and the costs of compensating households for VAT payments on a reasonable level of consumption.

Other than the resources used to provide the rebate, VAT revenues should be used largely, if not completely, for deficit reduction. While tax and spending reform require continued attention from policymakers, closing the fiscal gap is a top priority. To the extent that VAT revenues are used for other purposes, there will be fewer options left for balancing the federal budget.
We believe the states would benefit from dropping their sales taxes and rapidly harmonizing with a federal VAT, but that is an issue they can decide for themselves. If all states did harmonize and if the federal VAT rate were 10 percent, the resulting combined VAT rate—including the state and federal rate—would be on the order of 15 to 17 percent. This would still be below the OECD average, but would be sufficient to significantly close the long-term gap and replace and improve upon state-level sales taxes. It would also send a strong signal to consumer that public policymakers are aiming to reduce consumption and raise saving.
Given current economic challenges, the timing of a VAT is important. Instituting a significant tax on consumption during a recession would be counterproductive. The optimal time to implement a VAT is after the economy has returned to full employment.
The VAT is not the only tax or spending policy that can constructively help solve the fiscal problem, nor will it solve the problem by itself. Nevertheless, to oppose the VAT is to argue either (a) there is no fiscal gap, (b) ignoring the fiscal gap is better than imposing a VAT, or (c) there are better ways than the VAT to make policy sustainable. No one disputes the existence of a fiscal gap, though, and the economic costs of fiscal unsustainability are enormous. As to the notion that there are better ways to put fiscal policy on a sustainable path, we would be excited to learn about them. In the meantime, policy makers should not let the hypothetical—and to date undiscovered—ideal policy get in the way of the time-tested, more-than-adequate VAT.”   (Pg. 11-12)

http://www.brookings.edu/~/media/Files/rc/papers/2010/0721_vat_for_us_gale/0721_vat_for_us_gale.pdf


Clinton, President Bill, “Federal Budget and the National Debt,” interview with Bob Schieffer, Peterson Institute for International Economics, C-Span Video Library, 04/28/10

President Clinton: ”(T)he Europeans have used it quite successfully.  I think if you did it you’ld have to readjust the whole – the rest of the tax system to keep it progressive.  It’s also somewhat complex because it’s on every stage of the production process.  But, the one thing that blue collar America should like about it is it’s good for exports and it in effect, it doesn’t allow quite so much subsidy of imports – when other countries subsidize their production for export at least they get slapped with a value added tax when it comes in here.  And, it’s good for exports.  So, if you’re not willing to give up on manufacturing and I’m not, I think it’s a great time to,  for us to, rebuild a manufacturing sector in America.  If we had the right sort of value added tax and we made enough adjustments in the other tax bills to make it – to keep the progressivity of our tax system, it could be really good.

Now the real problem with the value added tax is the problem why we couldn’t pass the single-payer health system, right?  A lot of things that are good in theory require so much change that people just can’t make the mental leap.  So, I’m not at all sure, that the Simpson-Bowles Commission will wind up recommending it.  I know ‘em well enough to know that they’ld have to have a theory in their mind about how it could actually pass before they would recommend it.

It’s a big leap, but if you look at it, people in Europe – just like any other sales tax – they just get used to payin’ it, and it would be good for exports and it would, our home market products would, be on more even footing with imports if we had one.  And, we compete in countries that have ‘em all the time.  So we get it comin’ and goin’ because they have it and we don’t,” 58:14-1:00:30

http://www.c-spanvideo.org/program/293217-3

Kerry, Sen. John, in “US Eyes Sales Tax,” by Jay Fitzgerald, BostonHerald.com, 04/09/10

“The tax code remains too long, too complicated and too chock full of wasteful subsidies and giveaways that don’t make economic sense.  A big reform is overdue. We should simplify. You should look at and consider everything that would take some of the burden off of working people. We should definitely debate alternatives like the VAT, but the test of any idea should be fairness, progressivity and economic growth.”

Greenstein, Robert and Peter Orszag, “A Broken Federal Fiscal Policy…and How to Fix It,” in “What We Stand For, A Program for Progressive Patriotism, Mark Green, Editor, The New Democracy Project, New York, NY 2004

“(To raise revenues) another possibility is to introduce a value-added tax [VAT] in the United States to help reduce long-term budget deficits.  Most developed nations and all members of the European Union impose a VAT.  A broad-based VAT [one that excludes only small businesses, education, religion, and health cafe) would generate revenue equal to about one-half of 1 percent of GDP for each 1 percentage point of the tax.  By itself, a VAT would be regressive, so it would need to be accompanied by other tax-code changes to maintain the overall progressivity of the code,” p.84

Ferleger, Louis A., and Jay R. Mandle, “No Pain, No Gain, Taxes, Productivity and Economic Growth,” A Twentieth Century Fund Paper, New York, NY, 1992

“The VAT’s regressivity complicates matters.  Therefore the introduction of a VAT must be counterbalanced by a dramatic increase in the progressivity of the federal income tax,” p.3