Taxes and Health

Unlike most conservatives, I don’t cringe in fear that health reform will destroy the American health care system, nor do I believe that it is necessarily the best in the world. I think it could stand a lot of improvement and I think it’s too bad that Republicans have never put forward an alternative to the Democrats’ proposal.

That said, I have said from the beginning (here, here and here) that Barack Obama’s plan suffers from a fatal flaw: the lack of dedicated financing. I think he was wrong to finance a broad-based new government benefit that is not paid for largely by the beneficiaries, as Social Security and Medicare are.

Now there is some polling data that supports my argument. According to a new Reuters poll, 63% of Americans would be willing to pay more taxes to pay for health reform that improved the health care system.

Of course, there are a lot of questions left unanswered: what reforms constitute improvement, what sorts of taxes would people be willing to pay and how much. But at least in principle, this poll shows, contrary to Republican dogma, that people are willing to pay higher taxes if they get something worthwhile in return.

Update: There is a public meeting of the president’s tax reform task force today at 12:30. (link)

————————————

Tax Reform in California

An extremely important new report was issued yesterday by the State of California on reforming its tax system. The arguments it makes and the reforms it proposes are very much applicable to the national tax system as well.

The main point the report makes is that the nature of the economy and the nature of income have changed over the years, but the tax system has not changed to deal with them.

First, income has become more volatile as people receive less of it in the form of relatively stable wages and more in the form of capital gains, bonuses and stock options that may vary significantly from year to year.

Second, services are much bigger as a share of both production and consumption. By their nature, services are harder to tax than goods.

Third, technology and globalization make it easier for people to purchase goods and services across state and national borders, and to move capital and income to other jurisdictions where they are taxed at lower rates or not taxed at all.

As it has become harder for the state to tax certain forms of income and output, it has had to raise rates on those that it can still tax. This has led to very high marginal rates that impede economic growth and create unfairness.

The proposed tax reform would broaden the tax base by replacing the corporate income tax with a business net receipts tax that would be very similar to a value-added tax. It would also replace the state sales tax and significantly reduce the personal income tax.

The state believes that the new tax would be less volatile than the taxes it replaces and would improve its revenue-raising capacity to pay for spending that the state’s taxpayers are unwilling to cut. Here and here are links to some commentaries on the California initiative.

At least on paper, this appears to be an excellent proposal that is in line with a growing body of economic research. For example, a recent NBER study by Lawrence Summers and James Hines argues that globalization makes it harder for national governments to tax income and recommends that taxes be shifted more towards a consumption base. Summers is, of course, director of the National Economic Council in the White House.

A Wall Street Journal report from this morning indicates that a group with close White House ties, the Center for American Progress, will be recommending a VAT as part of a fiscal reform initiative to reduce budget deficits. It will be opposed by the usual right-wing suspects. But as I have explained on many occasions, they are fools because if we don’t raise revenues through a consumption tax they will inevitably be raised by soak-the-rich taxes that will be far more harmful to the economy. (See here, here, here, here, and here.)

• Become A Funded Futures Trader