taxes

A National Sales Tax to Pay for Health Care?

You're going to hear a lot in the coming weeks about passing a consumption tax to help foot the bill for health care reform.

You're going to hear a lot in the coming weeks about passing a consumption tax to help foot the bill for health care reform. It's going to sound like a pretty live option because it would raise a lot of money.

But don't believe a word of it. Whatever shape it might come in, whether it's a value-added tax, national sales tax, or something else, it's a non-starter. That's not a value judgment on a consumption tax. It's just a statement of political reality.

The huge amount of money that a consumption tax would raise is big enough to tempt many members of Congress, at least at first blush. One option said to be under consideration in the House would impose a value added tax of about 1.5% on goods and services, which would, by itself, raise enough revenue -- an estimated $600 billion over 10 years -- that other tax hikes might not even be necessary to foot the bill for health care reform.

Adding just a penny and a half to every dollar of goods someone buys has to be relatively painless, right? Or certainly less painful than some of the other options on the list, including: A surtax on incomes of single taxpayers making more than $200,000 a year and married couples over $250,000; taxing the value of a worker's employer provided coverage if it exceeds a certain amount; or making companies pay a tax on a portion of their health care spending.

Dig a little deeper, though, and the consumption tax may not be a slam dunk after all. Let's take that example of the 1.5% VAT. Problem is, you're only going to raise that amount of money if the VAT is slapped on virtually everything. There would certainly be complaints that the VAT is regressive, so there's little doubt that Congress would exempt basics such as food and prescription drugs, and possibly housing and utilities as well. Once you've done that, the VAT would have to be upwards of 3% to raise the same amount of money.

Problem No. 2: State and local governments' noses would be out of joint, big time. The sales tax belongs to them, they would argue, and the federal government has no business adding another tax on top of the ones they levy.

And there's also this: Where would it end? Enact a consumption tax and the camel's nose is firmly under the tent. Once a consumption tax is part of the tax code, it will be very easy to simply ratchet up the rate on the existing levy to gain the revenues for whatever big-ticket item needs to be paid for. Where would it end? Simple: It never gets started in the first place.

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