A Value Added Tax: Wrong Prescription

The debate raging in Washington over health-care reform reflects the anguish being felt across the nation over how to care for our loved ones. That the polity is even discussing extending a package of health benefits throughout the country is a tribute to the priorities of President Clinton and Hillary Rodham Clinton.

But good intentions are not enough. An ill-conceived health-care package can break the economy as easily as save it. An expensive program financed by a value-added tax (VAT), suggested recently by Health & Human Services Secretary Donna Shalala, could become such an economy-breaker.

At the heart of the current debate on health-care reform is the size of the guaranteed basic benefits package, the speed of making it available to the 37 million people without health insurance, and the cost it will impose on businesses and individuals. The bigger the package--and the faster those 37 million are included--the higher the cost. Liberals are pushing for a generous package of benefits that would include long-term care, extensive mental-health care, and prescription drugs. Price: $50 billion, $6.5 billion, and $10 billion, respectively. Including them would more than double the cost of a more bare-bones health-care package.

A 10% VAT, even if food and housing are exempt, could bring in about $70 billion a year. That would go a long way toward extending a generous health-benefits package to all who are now not covered. That's reason enough for Shalala to want the tax to pay for a huge new program she would supervise at HHS.

It's not good enough reason for President Clinton to agree. In theory a VAT, which is a national sales tax, is a good idea. A VAT taxes consumption rather than labor or investment. The U.S. economy would get a long-term boost if Washington enacted a VAT--but not to finance health-care reform.

The VAT's main drawback to financing health care is its main virtue--the tax is a monster revenue-raiser. An open checkbook--as the VAT has turned out to be in many European countries--would just fuel richer benefits and bigger subsidies. It would ease the pressure the Administration is now under to bring health costs under control.

Instituting a new tax on top of higher individual, corporate, and energy taxes won't help the economy, either. Second-quarter gross domestic product is likely to come in at 2% or so, far too weak to generate jobs in any major way. Higher taxes will tend to offset any benefits from lower interest rates. If the Administration is serious about a VAT, then it should reform the country's entire tax system. A VAT should replace, in large measure, income and payroll taxes and should be used to end the double taxation on dividends.

Failing that, the health-care reform package should be confined to what can be financed with higher "sin" and other taxes already on the books. A levy against some share of employer-paid health-insurance premiums might be considered. Most important, health benefits must be controlled as carefully as costs so that the initial package is modest and its extension to those currently not covered is gradual. President Clinton must realize that he can't control the limitless American appetite for health care by feeding it the endless income potential of a VAT.

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