City of Brass

City of Brass


health reform illustrates why we need a VAT

posted by Aziz Poonawalla

The simple truth (and increasing consensus) about health reform is that we needed it, badly. An economist at Kiplinger.com calls the just-passed health reform “no more and no less than a modest, credible start” to reforming our health care system. Conservative columnist Arthur Greene used the example of his wife’s illness to explain in detail how Obamacare will be a huge relief, illustrating how even an upper-middle class family can have serious problems in finding ways to pay for medical care. Greene is compelled to point out how it will mean less burden, not more, on the taxpayer:

Right now, we get a COBRA subsidy I don’t deserve. Without some serious reform, it’s likely that my wife will ultimately end up on Medicare with taxpayers picking up a large portion of her bills in any case. What makes sense is a policy that would give us sturdy health insurance covering all of her preexisting conditions with predictable, if high, premiums and enough benefits that we won’t owe thousands of dollars out-of-pocket after a single hospital stay. It seems pretty simple but, absent sweeping health care reform, no such option exists or will exist.

Such an option includes the (modified) community rating and guaranteed issue provisions of Obamacare. Making these things work, in turn, requires something similar to an individual mandate to purchase health insurance. Without that, people will buy insurance only when they get sick. (New Jersey has tried that.) A mandate, in turn, would require some subsidies for lower income individuals to purchase health insurance. And, with that, one basically has Obamacare.

Note that the CBO does find that the health reform bill reduces the deficit overall. This is important; the health reform bill saves money overall – here’s a handy chart breakdown of how it’s funded.

However, the problem of our long-term entitlement debt is undeniable. The federal debt is about 14 trillion dollars; but the unfunded liabilities of Medicare, Medicaid, and Social Security amount to almost 100 trillion that we will have to pay for – a structural problem that predates Obamacare and which if ignored could eventually consume the majority of our GDP. Obviously, this is unsustainable, given that the US has among the lowest income taxes in the world.

Health reform was just the final nail in the Right’s dreams of rolling back the New Deal. Which is why pragmatic conservatives are beginning to come around to my preferred solution – the only real way to pay for all of this in the long-term is to implement a VAT. Charles Krauthammer says it’s inevitable at NRO, Greg Mankiw notes that opposition from the right is mostly political instead of economic, and Pejman discusses VAT with Bruce Bartlett as a supply-side solution. Pejman notes that resigned support for a VAT is probably inevitable on the right, but the Left still needs to be convinced.

Someone once said that the Left thinks a VAT is too regressive, and the right thinks it brings in too much revenue. We’ll get a VAT when they both realize the other sides’ fears are true. In other words, liberals will get over their fear of the VAT being regressive when they realize that it will bring in so much revenue that it will indeed make the social safety net robust and bring immense relief. Conservatives will get over their fear of the VAT bringing in too much money (ie, power) to the government when they realize that it is a more equitable way of making consumers pay for what they consume rather than taxing income. The conservatives are beginning to come around, especially since they believe deficits are bad things again (though back in the Bush era they were singing a different tune, arguing deficits don’t matter). Now, we need to make the Left see the light. I’m going to take up that gauntlet.



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