To answer that question, the Atlantic's Clive Crook tracks down this Washington Post column by Henry Aaron and Isabel Sawhill called Bend the Revenue Curve. Crook is right: This is a really great column:
Great stuff. To Republicans who will invariably say "You can't raise taxes during a recession!" (although that "during a recession" part is only a recent postscript), VAT supporters could say: We're not. We're implementing the VAT only when unemployment drops under X percent, long after the recession is over. Furthermore the knowledge that taxes on consumption are going up might encourage Americans to buy more now -- perfect nudge.So here is what we propose: Congress should enact a value-added tax, the equivalent of a broad-based sales tax on all goods and services. It should take effect only after unemployment has fallen to a predetermined level or in, say, five years, whichever comes first. Congress should link revenue from the new tax and other sources directly to public health-care spending through a newly created health-care trust fund. The trust fund would pay for all federal health-care spending. This framework would mean that Americans would get the health care they are willing to pay for. If spending outpaces projections, Congress will have to choose between raising taxes and finding ways to slow the growth of spending.
By balancing revenue and health-care spending, such a reform would help solve America's long-term fiscal problems. In the near term, it would also support and sustain the economic recovery. Consumers would be encouraged to buy now, before the tax takes effect. And by showing financial markets that Congress is determined to put our fiscal household in order, it would help keep interest rates low and encourage investment. The trust fund mechanism would strengthen incentives to institute reforms that will actually bend the health-care cost curve, because measures to slow the growth of health-care spending would avoid unpopular future tax increases that would otherwise be necessary.
You need to look at what a VAT is and how it operates before writing about it. It's not a sales tax, it's a tax at every level of manufacturing.
Each level of the supply chain charges a VAT to the next level and receives a VAT credit for taxes paid on those purchases. The final consumer sees the price of the product (or service) and pays an additional sales or use tax on top of that. So each level of the business supply chain pays the tax on the amount of markup more or less.
Example: I buy raw materials and pay $3 in VAT, I process those materials into a product to sell to another manufacturer who payes me $7 in VAT, but I only remit $4 of VAT to the government.
If it's not replacing an existing tax it's a new tax, and one that will add to the cost of goods and services. Now, we need to be addressing the deficit problem, but taxing your way out of it isn't the answer by itself. Government and the public should be addressing the spending problem in a serious way. But if you think that the health care debate got ugly, start talking about cutting government services and programs.
Hi Paul. Two things.
1) Did the phrase "sales tax" appear in my post?
2) Have you seen what happens when we start talking about cutting government services and programs? People go crazy about euthanizing grandmothers and whatnot. Our spending is a problem, yes. But more serious, and sad, is the fact that as spending increases (possibly as a natural extension of our country's wealth) effective tax rates are not increasing. They are, in fact, decreasing, and Obama wants to not only extend the Bush tax cuts but also extend the MWP and other tax credits. We have to get serious about spending too much, but first we have to get serious about paying for what we spend.
So I guess you think we shouldn't even try to cut spending? This is the argument typical of health care reformers--we'll dramatically expand federal spending on health care, and hold down costs at the same time, by funding new programs with taxes to be spelled out now, and spending cuts to be determined somewhere down the road (cough-never-cough).
"But more serious, and sad, is the fact that as spending increases (possibly as a natural extension of our country's wealth) effective tax rates are not increasing."
Do you really think that our continuous spending increases are possible as a natural extension of our country's wealth? Um, no. These spending increases are being made possible not by our wealth, but by foreign investors' lending. We've been spending WAY beyond our WILLINGNESS to tax, yes, but also beyond our ABILITY to pay, period. Or rather, our ability to pay and still have a prosperous economy. The tax rates necessary to cover the deficit would be crushing.
Of course we should try to cut spending. We are trying to cut spending. That's what the Baucus bill does. It tries to cut spending. But will hospitals, insurance companies, doctors, Medicare recipients stand by while we slash Medicare by hundreds of billions over the next 10 years? I don't know that they will. Because nobody likes to see money they expect taken away from them.
That's also, obviously, true about taxes. We are of course spending way beyond our willingness to tax but it's absurd to me that given the political impossibility of cutting spending dramatically, one could be wholly unwilling to accept anything resembling an increased tax burden. I'm not asking to paper over the deficit with tax increases in the next 5 years. I'm saying that any reasonable person looking at this issue from either a domestic or financial market perspective has to grant that taxes will have to go up to pay for health inflation, begin to plug the deficit, show the Chinese we're serious about paying it down, etc.
Finally, I do, as a matter of moral obligation, think that as a nation growths wealthier, it should spend a higher percentage of its total income on government provided services. But that's a economic value I have rather than a principle I'm prepared to defend with statistics.
Look, I am not lauding the GOP here. They're dishonest--cut taxes, but not touch spending, in spite of promises to do so. I guess what I'm upset about is that the Democrats are adopting that dishonesty, and the health reform bill is a prime example. Dramatically increase spending, partially covered by increased taxation, but the promised spending cuts and cost controls never arrive, even though the bill was sold as a way to...CUT SPENDING AND HOLD DOWN COSTS!
I don't think I understand your last point below. You seem to care about the deficit. You want to cut spending, but don't think it's politically feasible. The only other way to fight a deficit is to raise taxes somewhere. Why are you against the VAT, again?
I do care about the deficit, and think it should be narrowed. I am in favor of doing the majority of that through reductions in spending, while recognizing that some tax increases are needed. I despair about the reality that spending cuts are politically unfeasible--the GOP says it will cut spending, but never does so; the Democrats sell further spending as a means to hold down long-term costs (health care), but will almost certainly fail to enact the measures necessary to...hold down long-term costs.
In that context, all a VAT would do is pile additional burdens on the taxpayer while spending--and the deficit--maintain their upward trajectory. That's why I oppose the VAT.
I'd prefer to massively cut the government. But that is just not going to happen. Face it, it's NOT. As such we need more revenues. But another 'Trust Fund', eh? I dunno if I like that. Will any surpluses just be rolled over to the General Fund, like they are now, in a horrid little accounting gimmick? Or will they actually be invested? Can we require it to be invested 100% in foreign sovereign debt?
LMAO! That is what qualifies as a "really great column"?
What is great about it? All they propose is to tax to fund healthcare spending with bending the curve to come in some future when revenues don't match spending again. Well, this is what we already have today- the spending is not matching the revenues, and we propose to simply spend more.
Seriously, I hope the Democrats pick this up and run with it.
Derek,
I agree we need to pay for what we spend, but at this point that does not apply to medical spending. You seem to be framing this article as if the government is already paying for health care, and this is adding to the deficit, so we need to figure out a way to pay for it. Most of this impression comes from your (fair) evaluation of the "death panel" cry. However, my problem there was not so much the government cutting programs because of a deficit, but that the government first wants to take over MORE health care spending, then cut it.
In other words, I wish the government would not attempt to take over the health care industry, and would instead focus on cutting out the spending disparity from region to region in Medicare and Medicaid revealed in the Dartmouth Study that supposedly started this debate in the first place.
I don't oppose taxes to pay for legitimate government expenses, including many of the welfare projects any moral society needs to provide, but I do have a problem with politicians that realize they have a deficit spending irresponsibly (like trying to expand health care before trying to control costs) and then saying "Look at this deficit! We need more taxes!"
VATs are evil.
Because they are hidden.
At least a sales tax is out in the open.
In Europe, the average VAT is 20%.
Think about consumers' reactions if they got smacked with a 20% sales tax at point of purchase?
Therefore in most EU countries the displayed prices (for consumers) ahve to be including VAT. Consumers do not see the VAT and most consumers do not know the VAT rate for the products they purchase.
I feel the current US systems where you get smacked up with sales tax at the cash counter is worse..