Two weeks ago, the Senate Finance Committee released its summary of options to pay for health care reform. As expected, the list was long and could be divided up any number of ways. One item missing from the list, however, is a source of revenue folks are talking about for health care reform and other spending priorities too — a value added tax (VAT).

The Finance Committee summary followed the release of papers on improving health care delivery and expanding coverage. The key to all three papers is that, while they give the reader a sense of where the Committee is headed, the exact plan remains shaded by options and generalities. So are the costs.

Exactly how much will health care reform cost? Some advocates — including the Obama Administration’s top economists — argue that a properly structured plan would save the taxpayer money, but that’s mere rhetoric. Expanding health care coverage to more Americans will cost money. Lots of it.

That’s why President Obama’s budget set aside $326 billion in tax increases to help pay for health care reform, but that may not be enough. Most observers believe the ultimate price tag will be several times higher while many of President Obama’s proposed pay-fors are simply non-starters with Congress. Enter the latest idea of a pay-for — the value-added tax. The Washington Post reported last week:

With budget deficits soaring and President Obama pushing a trillion-dollar plus expansion of health coverage, Some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

The story points out that, in addition to several well-placed congressional advocates, there are a few folks within the Obama Administration who support a VAT, such as Office of Management and Budget health advisor Ezekiel Emanuel (who also happens to be White House Chief of Staff Rahm Emanuel’s brother).

While this proposal is clearly far from becoming a reality, it is indicative of just how hungry Washington is for money these days that perhaps the most feared of all taxes — the VAT — is being floated as a possible revenue source.

How Progressive is Progressive?

The American economy is remarkably dynamic, with a large percentage of folks moving from one income group to another every couple years. This movement is often the product of life-cycle earnings, where workers earn little when they start out and then slowly increase their incomes until they reach their peak earnings years of around 40 to 65.

So what happens when you climb that economic ladder and reach those peak earning years? You’ll find a really high tax burden waiting for you. According the latest numbers from the Congressional Budget Office, the top twenty percent of income earners paid 70 percent of all Federal taxes in 2006. This percent has increased over the years and, contrary to popular (or should we say populist) perceptions, actually increased following the Bush tax cuts.

Your S-CORP team has often speculated that businesses follow the same pattern as workers, starting with little or no income and increasing their size and profitability as they mature (if they survive, of course). Recent work by the Kaufman Foundation gives us a better picture of which companies are a significant source of job creation. It turns out that, if you group businesses by age, the only net job creators are start-ups and firms 26 years and older. Every other age category is a net job loser.

It stands to reason that mature job-creating businesses are highly profitable too. If they are structured as S corporations, then their income is subject to the effective tax rates illustrated above. Something to think about as the unemployment rates approaches 10 percent.

Canada Runs Surpluses

Most references to Canada these days focus on the pros and cons of their universal health insurance system. Our friends at CATO have noticed something else about our neighbor to the north. While the U.S. is busy operating with the largest deficit in history, Canada is planning for a surplus.

Who knew Canada was running surpluses these days? How did they do it?

First, they cut spending at the Federal level from more than half of their national income to less than 40 percent. That, in turn, produced budget surpluses that were used to pay down their national debt.

Second, they cut taxes rather than raise them. Whereas Canada’s tax burden used to dwarf ours, in the next couple years Canadians will face individual and business tax rates that are no higher, and in many cases lower, than the rates we pay.

What’s the lesson here for S corporations? While Congress and the new Administration search the tax code for new revenues to offset new spending and reduce the deficit, the experience of Canada and others demonstrates that deficit reduction begins with spending restraint — not tax increases.