In the quest to find the money for reform, there is another semi-radical idea floating around: the VAT. A value-added tax (or VAT)--a special version of a sales tax--provides much of the funding for health coverage in Europe and other developed nations. In essence, a VAT is a tax on goods and services divided in three parts: one third to manufacturers, one third to distributors, and one third to retail sales. Ultimately, consumers pay the tax through an increase in the cost of goods and services. Some countries exclude health care and food (and sometimes rent) from the VAT, but it generally applies to all goods and services purchased or consumed. A national VAT of 10 percent similar to what is used elsewhere would ultimately pay for the entire price tag of health care reform in the US, and also leave a lot of money left over to do other impressive things.

While it’s a regressive tax (poor people pay the same tax as rich people for a given service or product), a VAT also returns a lot of resources to lower income people in the form of health care, education and other benefits to even things out. Also, rich people buy more things, and thus pay more VAT. A VAT would probably allow for the complete elimination of income tax for persons earning less than $100,000 a year (urging them to buy more), and could greatly reduce the rate of income tax payment for people making above $100,000.

Victor Fuchs, health economist at Stanford, has long argued this is the way to get both the health problem solved and financed, as well as to help reform our complicated income tax structure as well. I doubt this kind of bold move will actually turn into law, but it’s interesting to consider. It’s like shifting much of the income tax burden to a sales tax approach. I’m glad it’s at least on the table. But, we haven’t any comments on a VAT option to finance reform. No policy there at this point. But, it’s a fascinating idea--if the income tax element were also to really decline…

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