April 6, 2005

Taxing value

Ezra Klein and others discuss the idea of a Value Added Tax (VAT) and dedicating its revenue to health care.

I don't understand the liberal opposition, in principle, to a VAT (also known as GST for goods and services tax in Canada, Australia and New Zealand). A VAT at a moderate level (say 10%) with few exemptions is an efficient part of a well-designed tax system. It is ideally complemented with a relatively uncomplicated income tax, and taxes on inherited wealth and capital gains. And I do mean "few exemptions" -- in New Zealand they exempt house sales and financial services because these are the products its difficult to calculate the value added on. Food is not. If you are concerned with progressivity and making sure poor people don't starve bumping benefits up a little is the way to go.

I do understand the liberal hesitancy to get involved with how a VAT might be implemented by current Republican administrations. They are unlikely to get the details right.

I also think it would be politically wise for people to separate their discussion of reforming the tax system from what the revenues go to. In general I think the idea of dedicating taxes to specific purposes is something that needs to pass a high hurdle to be considered. It confuses the technical and distributional questions of raising revenue with the question of whether the expenditure is worthwhile.

For example, the proposed reductions in Twin Cities bus service come from dedicating motor vehicle sales tax revenue to the transit system. It probably seemed like a good idea at the time--make drivers pay for transit--but it also sets up completely the wrong incentives in the sense that if enough people drive less the revenue to transit goes down as the need goes up.

A VAT for health care wouldn't have quite the same perverse linkages, but it would conflate tax reform and publicly funded health care in a way that doesn't need to be done.

Posted by robe0419 at April 6, 2005 12:54 PM