Back in 2009, Len Burman, a tax scholar who leans to the left, published a tentative proposal for a tax overhaul in the Virginia Tax Review. The basic idea is that, as in the Emanuel-Fuchs proposal, a substantial federal VAT (in the range of 18-25%, depending on the breadth of the tax base) would be created to fund universal health care vouchers:
The VAT would finance a universal health insurance voucher that would replace all existing federal and state programs, including Medicare, Medicaid, and SCHIP, as well as tax subsidies for health insurance, the largest of these being the exclusion from income and payroll taxes of employer-sponsored insurance.
As Burman argues in the piece, this health VAT would be progressive, as the vouchers would be more valuable for low and middle income households than the tax exclusion for employer-provided health care (particularly for those who don’t currently receive employer-sponsored coverage) while it would be somewhat less valuable than the exclusion for high earners.
While Burman’s VAT looks strikingly high — far higher than the VAT proposed by Michael Graetz in his competitive tax plan — it’s worth noting that Burman’s VAT is designed to do more than Graetz’s. For example, Burman suggests that his VAT-funded health care vouchers essentially replace Medicaid, thus effectively federalizing health care provision for the poor. As we’ve discussed in this space, federalizing Medicaid would have the advantage of relieving the states of a significant burden and addressing the larger problem of misaligned incentives. Moreover, as Burman suggests, this “gift” to the states might make them less resistant to repealing the deductibility of state and local taxes, among other tax expenditures that benefit state and local governments.
Many observers will balk at the other key component of Burman’s plan, i.e., his overhaul of the personal income tax. Whereas Graetz uses his VAT to fund a generous exemption from the personal income tax ($100,000 for households, $50,000 for single adults), Burman proposes a two-rate structure — 15% and 25% — and “the 15% bracket starts on the first dollar of earnings.” To mitigate the impact on less-affluent households, Burman generous payroll tax credits and a fully refundable child and dependent care tax credit. Capital gains would be taxed at ordinary income rates, on the understanding that this would reduce tax sheltering activity. Burman presents a number of other provisions, e.g., a reduction of corporate income tax rate to 25%, various tweaks to tax expenditures, etc.
Burman’s tax overhaul is likely to induce serious sticker shock. The question, however, is whether his proposal is merely making certain costs that are not currently visible fully transparent. I wouldn’t endorse Burman’s proposal, not least because I’m concerned about the impact it would have on medical expenditures over time. (Burman, to his credit, insists on the importance of including effective cost controls, but of course that’s easier said than done.) But the proposal is certainly very interesting, and it represents a well-thought-out left-of-center alternative to Obamacare.