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Life Health > Health Insurance

Perils Of The VAT

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Recent discussions of the possibility of a Value Added Tax (VAT) being proposed in the U.S. produced a touch of nostalgia. The mention of a VAT brought back memories of my experience with it in another country.

My wife’s parent’s were both born in Denmark and came to this country in 1920. Because all of her relatives outside of the immediate family still live there, we take frequent trips to Denmark. It’s a wonderful little country and our trips were always pleasant and, in the early days, inexpensive.

On one such trip, it could have been as early as 1967, we were strolling along the Stroget (walking street) when we had our very first encounter with the concept of a VAT. The Stroget, located in the center of Copenhagen, is the shopping mecca of Denmark. All the fine stores like Jensens, Royal Copenhagen, Bing and Grundahl and Illums are there. It is a wonderful place to shop for fine Danish-made silver, porcelain, furs and china. It is almost always crowded with tourists–mostly English speaking.

On this occasion as we, and thousands of others, were walking along the Stroget, a large flatbed truck, crowded with shouting Danes, was inching its way along the street, elbowing its way through the crowd. The Danes were protesting the proposal to impose a new tax called “MOMS.” I later learned that MOMS was a value added tax. Many of the protestors were waving signs, mostly in English. One sign in particular that I remember said, “Americans help your Danish brothers fight MOMS.”

Despite its unpopularity with the people, a 10% VAT was installed and prices began to rise on just about everything. Justification for the tax was to pay for the welfare state’s expensive programs, including health care and survivor benefits.

Several years later, Gladys and I were again strolling the Stroget when we witnessed another Danish protest. This time there were two trucks and a band and even louder shouting. This second protest was denouncing the imposition of “double MOMS.” The VAT was now being raised to 20%. The protest was to no avail and the increased VAT went into effect–thus raising prices again to meet the rising costs associated with their welfare programs.

Today, the VAT, in both Denmark and its neighbor Sweden, is at 25%. And how has this affected Gladys and me? For one thing we don’t go there as often anymore. What used to be a relatively inexpensive vacation has become just the opposite. Food and lodging costs are up dramatically, as well as most everything else. This has meant less money to spend on items we ordinarily would bring home (the VAT does not apply to items taken out of the country). Moreover, when Gladys’s Danish relatives visit us, they load up on items such as luggage and clothing, which they say is twice as expensive in Denmark.

Of course the important question for us is how does a VAT affect those of us who sell life and health insurance? I am not sure how a VAT impacts the products we sell, but I do remember that when the possibility of a U.S. VAT was raised about 25 years ago there was some concern. A very knowledgeable friend said he thought it might have adversely affected company investments unless we were able to get an exemption. I will let the company actuaries and investment people worry about that for there are more significant problems in the marketing area, which we will likely face if a VAT should come to pass in this country.

For starters, a VAT affects all consumers because it taxes consumption. It is tantamount to a national sales tax. The tax raises the price of goods, and to the extent it does that means there is less money to spend on other items such as life insurance. We are to some degree “crowded out.” As more money is diverted to taxes, the less impact consumers will have driving the engine we call our economy. A weaker economy also diminishes our own market as well.

The history of Denmark and Sweden demonstrates how easy and uncomplicated it is for government to jack up the rate once a VAT is in place. The impact of a low going-in rate may not be felt at first–much like the old adage about boiling a frog. Put the frog in cold water and bring the heat up slowly and he won’t know he is being boiled until it is too late to jump out of the pot.

The European countries all use their VAT to support their various welfare programs, most notably, their health care. Denmark and Sweden are not gung-ho life insurance markets, with most of it term insurance sold in branch banks by clerks. I can remember only one MDRT member from Sweden, Bo Soderman, and I have not seen him listed in a roster for many years.

It is worth noting that all of the aforementioned welfare programs are government run. I believe that it is also logical to surmise that if a VAT makes its way into our taxing mechanism, it will eventually eliminate most of the private sector that now provides relief from the hazards of living too long or not long enough. From personal observation and in conversation with European friends and relatives, most are content with their systems–not because they are great, but rather, they are better than what they formerly had.

Our private programs have evolved in a much different way. We are not climbing the same ladder. It is far better to improve what we have than throw it all away.

While returning from one of our most recent trips to Denmark, we passed through customs at JFK Airport. The customs official never even looked at our luggage and explained, “Nobody buys much in Scandanavia anymore–it’s too expensive.”


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