In the 91 years since Mark Twain explained the difference between a taxidermist and a tax collector-the taxidermist takes only your skin-Americans have become chronically angry about taxes. So how is a well-meaning president to pay for insuring the uninsured? Taxing cigarettes is popular enough, but a steep levy would lead to less smoking and, in short order, less money. The VAT, comfortingly close to the familiar sales tax, is another way to raise revenue without raising hackles. Jane Gravelle, a tax expert at the Congressional Research Service, puts her finger firmly on Clinton’s problem. “Why do we want a VAT?” she asks. “We want a VAT because, for reasons we can’t quite discern, we feel we can’t raise income-tax rates.”
Scratch an Average American and you’ll find someone who believes himself or herself to be vastly overtaxed; never mind that the United States pays far less of its income in taxes than other advanced countries. Do you see taxes rising out of sight? Federal, state and local taxes swallow about the same share of the nation’s output, 30 percent, as they did 25 years ago. Think the president should avoid tax hikes by slicing the fat out of government? Even if Clinton abolishes the military, eliminates the Department of Energy and kills the space program, too, the federal budget will still be in deficit.
Behind the widespread conviction that taxes are too high lies a distressingly vague idea of how high taxes really are. Many Americans pay far less than they think. Of the 112 million federal income-tax returns filed for 1989 23 million showed no tax liability at all. More than two thirds of the rest faced the minimum rate, 15 percent and after exemptions and deductions, the average federal income-tax bill for those 65 million taxpayers was a scant 7.8 percent of their reported income. Even folks in upper brackets often forget that the 28 and 33 percent tax rates apply only on the margin: the 13 million payers with incomes of $50,000 to $100,000 had most of their income taxed at 15 percent. And for 31 million taxpayers, Uncle Sam even pays a share of state and local taxes through deductions on the federal return.
The appeal of the VAT is that it offers little occasion for emotional outpourings. There’s nothing to see: unlike sales taxes, which are tacked on top of a product’s purchase price, VAT is already included. It’s loophole-free, with everybody paying at the same rate. By making consumption more expensive, it has the potential to change the habits of a nation that loves to spend and hates to save. And then there’s the not-so-negligible fact that it could raise huge sums of money. A VAT of only 3 percent could generate $70 billion or $80 billion.
But those virtues are also VAT’s defects. VAT’s potential as a money machine worries conservatives whose preference is to starve the Treasury, not to feed it. Many liberals don’t like it any better: VAT taxes spending without regard for income. The government could protect the poor from VAT’s impact by giving them money-but there goes much of the revenue. Another alternative: exempting basics like food and clothing. But that would reduce the Treasury’s take and eliminate the simplicity that makes a flat-rate VAT sound so attractive. “There’s a risk that we’ll introduce another complicated, expensive-to-administer tax,” says Princeton economist David Bradford.
So why bother? The income tax is plenty powerful enough to handle health care. Taxing overly generous health-insurance benefits as income would bring in at least $10 billion a year and would ease pressure on health-care costs, too. Taxing part of the value of Medicare benefits would do much the same. And there are still huge loopholes favoring upper-income families, such as the mortgage-interest deduction, that could be closed while increasing revenue. In deference to his political backers, President Clinton chose not to fight those issues when he announced his budget. No question, they’ll be hard to win. But with the public keyed for action on health care, he has a unique chance to clean up major inequities in the old tax code. Far better that than introduce a set of new ones.
