Like it or not, health care and taxes are inextricably linked in the U.S. The employer-sponsored health system that covers most of the non-elderly is largely built on nearly $200 billion in income tax breaks. The biggest: employer-sponsored insurance which is tax-free to workers. Perversely, this structure provides the biggest tax breaks to the highest income workers who get the most expensive plans.
Nearly all economists agree that this is terrible tax policy and many are looking for ways to fix it. Some want to drop the exclusion completely and use tax incentives to encourage the purchase of individual insurance. Some want to cap it for plans worth, say, $12,000 or more. Others want to turn the current deduction into a credit, which would benefit lower-income workers. Still others would take the money from tax breaks that now go to employer coverage and use it to help fund universal or near-universal insurance similar to plans proposed by Hillary Clinton and Barack Obama.
Others, such as Ezekial Emanuel and Victor Fuchs, have an even more ambitious idea. They’d create a European-style Value Added Tax and use the huge slug of new revenue for health care vouchers, which people would use to help buy insurance.
My TPC colleague Len Burman, who comes at the problem from the perspective of tax reform as well as health care reform, would go yet another step. He’d create a VAT of about 15 percent to fund these health vouchers. But Burman would also use the VAT revenue to reform and simplify the income tax.
He’d set two individual rates—say, 15 percent and 25 percent—and eliminate the personal exemption, the standard deduction, and most itemized deductions. He’d also dump the exclusion for employer-sponsored health insurance and vastly simplify retirement savings incentives.
Burman’s VAT would not only help pay for private insurance, it would also finance Medicaid, veterans health, and the share of Medicare that is now supported through general revenues (about $200 billion in 2009).
Burman is hardly the first policy maven to push the VAT. Yale professor Michael Graetz backs one of roughly 10 percent to 14 percent. However, Graetz would use the VAT revenue to eliminate the income tax for nearly all taxpayers—those earning less than, say $100,000. The TPC’s Bill Gale has also suggested a VAT, but as an additional source of revenue rather than as a replacement for the income tax.
Right now, with a new Administration just eight months from taking office, policy experts are putting a huge amount of energy into both health and tax reform. The expiration of the Bush tax cuts and the ongoing Alternative Minimum Tax mess will surely drive big tax changes in 2009 or 2010. Health reform is also on the table, although short-term odds for reform may be longer. The question is: How will these two mega-issues fit together?
