Value Added Tax

 Many countries around the world levy a Value Added Tax (VAT). Conservatives resist the idea of adding a VAT to our tax burden would balloon government spending and the size of government. (I don’t like the VAT either, but I see no other viable solution to the gigantic national debt that we must find a solution for.) One could look with alarm at the tax burdens of other countries and believe that the VAT is to blame.

Source: Revenue Statistics 2018 Tax revenue trends in the OECD, 2018

This graph shows total taxes of all kinds, as a percentage of the countries’ Gross Domestic Product. By comparison, the United States (5^th from the right) at 27.1% looks pretty low. But the graph applies the “bikini principle”: it reveals that which is interesting, but hides what is vital. Different countries do similar things in different ways. Most of the countries with apparently high tax burdens include health care costs in their government spending paid by taxes. In the United States, a large percentage of health care costs are paid by employers which does not show up as a tax burden, but simply as an expense. This shows up dramatically in this graph from Taxing Wages 2019, OECD 2019.

The effect of shifting the burden of health care costs from employers to the national government via a plan roughly described above coupled with a compensating VAT would be to increase the tax burden in the USA to something comparable to many European countries.

Some may resist this idea because they view many of the European countries as socialist. Actually, none of the European countries are socialist, but rather capitalist based economies with more robust social safety nets. Could we tolerate this in the U.S.? I think so, if we get the incentives right such that a measure of individual responsibility goes with the access to health care.