VAT on the horizon

Several months ago, a friend met with a high government official and expressed concern that the new health care bill would be more expensive than people were saying. "Oh yes," said the official, "In several years, the United States will pass a value-added tax to cover the cost."

After the bill passed, Charles Krauthammer wrote this column in the National Review saying the same thing:

American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.

I believe that a VAT is a move in the right direction. (I distinguish for the moment between amounts of taxation and the form of taxation.) Current tax policy in the United States discourages saving and investment and rewards consumption. Think of the double taxation on what you earn as salary and then what you earn as interest on your savings; think of income taxes on corporate profits and then again on the dividends you collect. A VAT avoids those problems.

The problem with a VAT is that it is regressive in nature, affecting lower income people more than wealthier people because lower income people spend a bigger percentage of their income on consumables. But you can adjust for that with income-based rebates or exemptions.

But, there is the danger that this tax will be able to be increased with little public scrutiny. It will not necessarily be visible because it is added at each stage of production, and so Congress could just jack it up whenever it wants. Also, you don't hear talk of reducing other taxes as this new one is introduced. That is why some people are nervous, like the gentleman quoted here:

Jon Hurst, president of the Retailers Association of Massachusetts, said he fears a value-added tax would simply be used to fund new programs....

The costs of health care reform were intentionally designed not show up in a big way until well into the next Presidential term. It is thus likely that it will be a few years before the debate begins in earnest, but it is on the horizon.