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Paying for Health Care Part III – The VAT Tax July 7, 2009

Posted by Kate Ryan in Economy, Health Care, National Politics, Taxes, VAT Tax.
Tags: , , , , , , ,

VAT%20TaxIf any of you have travelled in Europe and purchased souvenirs, you were probably given forms to fill out and turn in at the airport or some other transportation center for a refund of the VAT (value-added tax) you paid.  I never took my refunds unless they were significant (more than $50) and some of the rules made it just too annoying to even bother – which I’m sure was by design.  I even think that the last time I was in Europe, the French hatched a clever plot to keep my money (more on that some other time) as I was not able to turn my forms in at Charles DeGaulle airport.  Whatever happened, the VAT tax is an enormous revenue-raiser in the European Union and many Americans think that it is time the United States considers one as well.

What is a VAT tax?  It is simply one of the world’s most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. Unlike a sales tax, that is levied by a government at the point of sale, a VAT is levied at every stage of production on the value that the production added to the product.  The next stage of production is allowed a credit for the item on the tax already paid so that no one producers incurs an enormous burden.  Many countries have variable VAT rates depending upon what the finished product will be; for example, foodstuffs may carry a VAT of 5%, durable goods 12%, and industrial machinery 20%.  The idea of a VAT tax seems complex, but it is really simple.

In a traditional sales tax scenario, let us say that a manufacturer pays $1.00 for the raw materials to produce a key chain.  He purchases the material, certifying to the government that he is not the end-user, and makes the key chain.  The manufacturer sells the item to a retailer for the price of $1.20 – again certifying that he is not the end user – allowing him a profit of 20 cents.  The retailer wants to charge $1.50 for the key chain; this price point would allow him to achieve a 30-cent profit on it.  The retailer, however, must collect a 10% sales tax for the government; he therefore, must charge the consumer $1.65 ($1.50 plus 10% tax) to ensure he maintains his profit of 30 cents. 

 In a 10% VAT scheme, the manufacturer of the item would purchase raw material at a cost of $1.10 and the material supplier would pay the 10 cents to the government in VAT.  The manufacturer would then sell the key chain to the retailer at a price of $1.32; he exempts the tax already paid (10 cents) and sends the government 2 cents – the value added to the raw materials because of his production – and still maintains his 20-cent profit.  Finally, the retailer charges the consumer $1.65 for the key chain, exempting the 12 cents tax paid to the manufacturer, sending 3 cents to the government, and maintaining a 30-cent profit.

In either case, the consumer ends up paying the same amount of money for the product.  He would, of course, pay more if state and/or local sales taxes were levied on the product as well.  Where I am, that $1.65 item would cost me $1.80  so it may seem as though persons living in high-tax states would be disadvantaged.  That could be, but estimates reveal that the VAT could replace or reduce so many other taxes and fees that it should not have too detrimental an effect.

The advantage to a VAT is that it is hard to avoid.  Producers, wholesalers, and retailers must record all transactions and pay a portion of the VAT.  Consumers are more likely to attempt to dodge paying sales taxes – especially as the price of the items for sale goes higher – in any number of ways; tax-free internet sales are the largest.  Conversely, the VAT is built into the price of the item.  In both our examples above, the government gets its 15 cents tax – paid before the key chain is ever sold. 

So how would instituting a VAT help pay for health care?  Studies have shown that a 10% to 14% VAT would bring hundreds of billions of dollars into the treasury every year.  White House Budget Director Peter Orszag and Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel and author of the 2008 book “Health Care, Guaranteed”, have estimated that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. 

Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution,  testified on Capitol Hill this month about a U.S. VAT plan.  Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent.  There is considerable sticker shock at a 25% VAT rate; a gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250.  This would, however, provide every American with health care and pay down our significant debt – a goal that all of us should be on board with.

Critics of the VAT see it as terribly regressive.  Imagine seeing your grocery bill go up 25%, or your energy bill, or your auto repair bill.  Yikes!  But VATs can be designed so that certain items are exempted from the tax.  The EITC could be further expanded to rebate some VAT back to the poorest citizens.  Also, if the VAT could significantly reduce your income tax bill, then you would have more money in your pocket to pay for the things you need.  If you were not paying exorbitant health insurance premiums, you would have more money to spend.  It stands to reason that I might be able to afford more groceries and lights if I weren’t shelling out $800 buck a month for health care premiums.

The VAT is an option that must be on the table when we are discussing health care reform.  It fits in well with the concept of “everybody covered – everybody pays”.  Too many of the financing options that Congress is discussing place the burden of paying for any program unequally on segments of citizens.  Just smokers, or fatties, or drinkers, or even super rich people should not be expected to bear the cost of a program that all Americans will benefit from.  This tax, in combination with other taxes and new revenue streams, should be just what the doctor ordered.

(Please see “Paying for Health Care” [6/10/09] and “Paying for Health Care Part II – The Transaction Tax” [6/18/09] for more ideas)



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