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Rising Healthcare Costs have Tax Consequences for US Government

August 29th

Analysts from the Tax Foundation have assessed the potential for rising national debt, despite the recent debt ceiling deal. This phenomenon, they say, is largely due to rapidly-increasing healthcare spending.

Currently Medicare and Medicaid are the two largest components of healthcare spending, but over the next few years this is expected to change. In 2014 the “other healthcare” benefits will come into effect, thereby causing healthcare spending to skyrocket. As such, the budget could experience further debt issues. Yet, the US budget and system of taxation does not allow for this rise in spending.

Value-Added Tax Necessary to Fund Entitlement Programs ?

The Tax Foundation explains that many countries, such as Germany and the UK, that have large welfare systems have managed to keep their AAA credit ratings through the application of high taxes on goods and services, particularly a Value-Added Tax (VAT).

A VAT is the largest source of revenue for these European welfare-states, thus enabling them to sustain high-cost public programs. However, such a cost would significantly change the way Americans behave and spend. A VAT would lead to much higher taxes than Americans are currently accustomed to – very possibly as much as 10 percent more in taxes as a share of gross domestic product.

This substantial tax increase would have a profound effect on the long-term growth trend in the United States. Such a high level of taxation would considerably slow economic growth in the US, and require greater tax planning from individual taxpayers, but would be a great help in funding a wide range of public programs.

In the end, it appears to be a trade-off. The US government presently promises European-style welfare programs, but also promises that American taxpayers won’t have to pay for it. This is not a sustainable plan. Ultimately, there appear to be two options: significantly reduce the promises made to entitlement recipients, especially with regards to healthcare, or evolve a high-tax, low-growth system through the implementation of a VAT, like many European democracies.


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