How the Left Really Plans to Pay for Obamacare

Heritage Foundation

According to the Congressional Budget Office (CBO), over half of President Barack Obama's new $940 billion health care entitlement is paid for by price-fixing Medicare cuts. Never mind that the President's own Centers for Medicare and Medicaid Services says that these cuts would cause "roughly 20 percent" of Medicare providers to go bankrupt in Obamacare's first ten years. The CBO has to believe these cuts will happen because they are required, by law, to believe everything Congress tells them. The American people are not. So the American people ought to know that instead of cutting doctors' Medicare reimbursement rates by 21% as required by law on April 1, the Centers for Medicare and Medicaid Services froze payments at current levels until Congress could come back after Easter recess and rescind those cuts. Again. As they have done every year but one since the cuts were first enacted in 1997.

This doc fix is big enough that, if it had been included as a cost of Obamacare, it would have sent the President's bill into the red all by itself. But the half trillion dollars in Medicare cuts used to fund the rest of Obamacare are a much bigger problem. Even if we assume they all go as planned, President Obama's budget would borrow 42 cents for each dollar spent in 2010; would run a $1.6 trillion deficit in 2010; and would leave permanent deficits that top $1 trillion as late as 2020. Add on the half trillion dollars in Medicare cuts that, given Congress' track record, the American people would be naive to think will ever happen, and the federal government is looking at a pile of new debt.

The left's solution to this problem has been simmering for some time now. Senate Budget Committee chairman Kent Conrad (D-ND) floated the idea to The Washington Post last May. Speaker Nancy Pelosi (D-CA) told Charlie Rose it was "on the table" in October. And yesterday White House adviser Paul Volcker told the New York Historical Society it should be considered. The "it" here is a Value Added Tax (VAT), which is a fancy way of saying national sales tax.

A VAT can be (and has been) structured in many different ways. But the real world results are always the same: higher taxes, more government spending, lower growth, fewer jobs and more special interest power.

Higher Taxes: Don't believe for a second that a VAT will help offset other taxes. International evidence clearly shows that a VAT is likely to increase the aggregate burden of govern­ment. Europeans used to only have a slightly higher tax burden than the United States. But beginning in the late 1960s, European countries began to implement VATs. Since then, the overall tax burden in Europe has climbed rapidly. And once a VAT is in place, the evidence shows that the tax rate rises over time.

Higher Government Spending: Not surprisingly, with more revenues, European governments turn around and spend much more than the United States does. According to a study by the U.S. Chamber of Commerce, government spending grew 45 percent faster in VAT nations than in non-VAT countries.

Slower Growth: According to the academic literature, there is a strong negative relationship between govern­ment spending and economic performance. In other words, more government spending means less economic growth and fewer jobs. Economic growth is driven by individuals and entrepreneurs operating in free markets, not by Washington spending and regulations.

More Power to Washington: There is one economy that would greatly benefit from a VAT: Washington, DC. No VAT could ever be levied evenly on all goods and services. Due to political considerations, a VAT in addition to current taxes would likely exempt politically sensitive items like food, clothing, health care and housing. Industries would lobby heavily for exemptions from the VAT for the economic benefits described above. This would give Congress an even larger role in picking winners and losers in the marketplace. Success would depend less on ingenuity and hard work and more on the ability to gain political favor.

Our nation faces a financial crisis. But low revenues are not the problem. Spending is. Heritage fellow Brian Riedl explains:

Real federal spending remained steady at $21,000 per household throughout the 1980s and 1990s, before President Bush hiked it to $25,000 per household. Now, President Obama has a proposed a budget that would permanently spend a staggering $32,000 per household annually – and that’s before all the baby boomers retire and add another $10,000 per household in Social Security, Medicare, and Medicare costs to the bottom line.

So the problem is not declining revenues, but rather a spending spree unlike any in American history. If Washington insists on spending $32,000 per household, it will have to tax $32,000 per household – an unaffordable and unfair tax burden regardless what kind of tax collects it.

Rather than tax America into permanent economic stagnation, President Obama and Congress must rein in runaway federal spending. Simply bringing real federal spending back to the $21,000 per household average that prevailed in the 1980s and 1990s would balance the budget by 2012 without raising a single tax on anyone. Even returning spending to the pre-recession level of 20 percent of GDP would eliminate two-thirds of the projected 2019 budget deficit without raising taxes.