Last Saturday night around midnight, I was standing in the middle of a street in Tamale, trying in vain to beg or bribe a taxi driver to stop and take a dying man to the hospital. I hadn’t seen the motorcycle collision that injured this man and one other, but the small crowd, the battered bikes, and the bloody, limp bodies told the story clearly. My makeup, blond hair (combed for once), and red dress, which correctly marked me as a foreigner on my way to a dance club—normally very desirable fare for a taxi—suddenly carried little cachet. As multiple taxis turned me down, two of the man’s friends began a futile and possibly fatal attempt to load him onto the back of the motorcycle. His neck and limbs flopped sickeningly as the motorcycle sparked to life and died repeatedly.

In the end, the only way we could convince a driver to take the man to the hospital was to have a white person accompany him. A friend of mine drove ahead of the taxi on his own motorcycle, carrying one of the man’s friends. We paid the driver four times the going rate. As they drove away, a woman watching the scene remarked to me, “Of course the taxi driver can’t take the man. When he gets to the hospital, they will hold him responsible and make him pay if the man can’t.”

Welcome to a world where individuals have the liberty not to have health coverage, and face the consequences for how they exercise that liberty. In Ghana, you don’t get treatment—sometimes even life-saving treatment—until you prove you can pay for it. Doctors will sit and watch you bleed while your friends and family cobble together money for payment, or rush to renew your health insurance policy. I once saw a four-year-old boy delivered to a rural health clinic after he ran onto the highway and was hit by a motorcycle. There was nothing the clinic could have done to save him. His mother spent his last moments not by his side, but running desperately through the village to get his insurance card.

The issue of allowing indigent or liquidity-constrained individuals (those who could pay back their medical bills over time) to die aside, the serious economic issue here is that when the default assumption is that people cannot pay for health care, there are negative externalities that mean even those who can pay for care may not get it promptly, and as a result, may have worse outcomes.  A man with thousands of cedis in his account should be able to get a taxi to the hospital; he should not be left on the road because the drivers fear he will be turned away on the hospital steps. A child with insurance should be treated promptly; he should not be left bleeding on a clinic table while his mother runs for proof of insurance.

Those who support universal health care, or an insurance mandate, should not fail to recognize the costs, in terms of our government budget deficit, burden on the poor, and loss of economic freedom.  However, those who are opposed to it should recognize the full costs of that liberty as well.

Congress is, no surprise, talking budget and tax reform again.  The 2001 and 2003 tax cuts are set to expire at the end of the year, and the federal debt is now equal to about 60% of GDP, the highest level since just after WWII.  (These figures come from Donald Marron’s very well-balanced testimony on the topic, which you can find here.)

In discussion of tax reform, the idea of instituting a value-added tax (VAT) seems to be a perennial favorite of economists.  Here is a quick overview of the difference between a VAT and a sales tax, and the reasons economists tend prefer the former:

A sales tax is based on a percent of the price of a product sold to a consumer.  In contrast, a VAT is levied on the extra value that is added to a product at each stage in its development.  For example, under a sales tax, an ice cream shop would collect and pay tax based on the final price of an ice cream sundae it sells.  Under a VAT, the ice cream shop would only collect and pay tax on the difference between the final price of the sundae and the costs of the inputs required to make the sundae: cream, sugar, bananas, peanuts, etc.  Both systems result in a tax burden that is eventually paid by the end consumer, but the VAT has several advantages:

• VAT doesn’t double-tax.  Double-taxation is broadly considered to be a bad thing in economics, because it means that some people have to pay a tax twice (or more times) on one economic activity.  This creates extra distortions, in the form of disincentives to engage in these activities.  In the case of VAT vs. sales tax, the sales tax would tax the cream based on its price, and then tax the ice cream based on its price—but the price of the ice cream includes the price of the cream, which was already taxed once.   This means that goods that have gone through more stages of production—that are higher up the value-added chain-- are taxed more heavily than goods that have only one stage of production before being sold to the final consumer.   While it is generally undesirable to have taxes that discriminate against certain types of products, this might be especially concerning if we want our economy to make high tech, high value products, which often go through many stages of manufacturing. 

• VAT doesn’t favor monopolies.  Since sales tax must be paid each time something is sold, there is an advantage to being a large, vertically integrated firm that engages in all stages of production of a product.  It is more expensive to be a small, specialized firm.  VAT does not create this distortion, so it puts smaller firms on more even footing with large ones. 

• VAT has inherent checks on fraud.  In a sales tax system, consumers have no incentive to make sure that producers are submitting the correct taxes for the good they purchase.  However, in a VAT system, the consumers in the middle of the value-added chain have an incentive to make sure their suppliers are submitting the correct taxes.   VATs are collected for each sale based on the price(like the sales tax), but each person paying the tax can deduct the price they paid for inputs from the total they owe.  As a result, they will check that the person they bought the inputs from submitted the correct tax, because otherwise the tax they pay will be inconsistent with what their supplier submitted, and it would be obvious that one of them engaged in fraud.

• VAT is easy to scale up or down to meet revenue needs.  When sales taxes get too high—generally above 10%-- consumers start finding ways to circumvent it, such as buying online, etc.  VAT is harder to circumvent, and harder to see, since it doesn’t hit all at once, so it is easier to raise the VAT rate without losing revenue to tax avoidance.  (Note: Some conservatives, who one might think would support VAT, don’t like it for this reason—it makes it too easy for governments to raise taxes.)

VAT is not without problems: like the sales tax, VAT is regressive, falling most heavily on those whose consumption is the largest share of their income: the poor.  One option for addressing this problem is providing off-setting  payments from the government to low income individuals.