THE BLOG
07/20/2009 05:12 am ET Updated May 25, 2011

Funding Social Security and Healthcare in a Globalized Economy: A Progressive Sales Tax on Goods and Services

A flat payroll tax, matched by employers, funds Social Security and Medicare. Those taxes add to the cost of labor, and thus to the costs of goods and services produced in the United States. In a globalized world that puts US workers at a relative disadvantage.

The tax for Social Security is regressive, taxing the first $~100K of salary but not above. The Medicare tax is a flat tax on all wages, not as regressive as the Social Security tax, but hardly progressive.

As our workforce: retiree ratio shrinks fewer workers have to support more retirees. Moreover, so long as our revenue base is limited by wages, the ability to enlarge revenues to account for increased needs is compromised.

For all these reasons, the president should use this moment to replace these taxes (with a minor exception) with a progressive sales tax on goods and services. Dedicating these taxes to health care and social security also provides transparency, so that people know exactly where their taxes are going. We have found in Washington State that directly linking a tax to a benefit provides far more support for the tax than when the revenues just "disappear" into general revenues.

Progressivity is achieved by exempting from this tax those categories of goods and services that consume large fractions of lower-wage workers' incomes: food, clothing, rent, physicians' services, medications, children's school supplies (and probably some others). With those excluded, a sales tax on goods and services, whether produced in the United States or not, should be levied at whatever percentage rate is required to meet the expenses of the entitlements (that ought to include Medicaid and whatever is needed for health care reform and universal coverage).

This program has many benefits. First, unlike the current system, it is progressive, wealthier people who consume more will pay more. It is, moreover, a tax cut on the income of everyone, with lower-wage workers benefiting more on a percentage basis than upper income. It is also a tax cut for corporations.

Second, it reaches services (that account for about 60% of US "production") as well as goods, thereby taking the burden off of manufacturing alone and enabling a lower tax rate because of its breadth. Third, it stops adding to costs only of goods and services produced in the US, but rather spreads them among all goods and services sold in the US.

Fourth, by linking this tax to entitlements, it is "transparent", i.e., if the country wants to increase or decrease the benefits, it will know what percent change in the sales' tax is required. That will generate intelligent debate. Fifth, it de-links revenues from the number of workers per retiree, a strain on the current system.

There is one caveat. To eliminate the entire Social Security tax would be to de-link work from retirement benefits. To prevent that, I suggest a 2% corporate contribution (instead of today's 6%) be maintained for each employee. That way, each employee's work and contribution can be measured, and the social security to which that person is entitled can be calculated in exactly the same way as it is today. [Or it could be 1% for the employee matched by 1% from the Company].

Otherwise, this is a far superior way to pay for entitlements than is currently being considered. It would begin to align our tax code with the realities of a globalized economy.

The health care debate provides the perfect crucible for melding these elements together. By wide margins the American people want their health care guaranteed. Defining a means to pay for it, that is broad and therefore perceived as fair, that equally impacts foreign and US goods and services, that has a substantial degree of progressivity, and that is, importantly, transparent to the taxpayer (want to decrease the tax rate? OK, what benefits will be given up; want more benefits? OK, how much will the tax rate need to raised?), improves the prospects for broad support the health care reform effort requires.

The right wing will wail about "new taxes". But, if we do not fight the right wing on this issue, with broad-based public support, and a worker-friendly/employer-friendly/deficit-neutral tax to pay for it, what then will this country ever rise to the occasion to fight for?