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.