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After repeatedly claiming that the middle class won’t see a tax increase under any of her policy proposals, Sen. Elizabeth Warren (D-Mass.) released the details on Friday of how she plans to pay for Medicare for All. The proposal can hardly be taken seriously, as Warren is, more likely than not, under-estimating the cost of Medicare for All and over-estimating the tax revenues that her proposals will bring in to the treasury.
Let’s start with the cost. Warren’s advisers claim that Medicare for All will cost “just under $52 trillion over ten years” compared to $52 trillion in the national healthcare expenditures (NHE) projected in the same time period. NHE includes federal, state, local, and employer healthcare spending. Warren’s plan would include other changes to federal policy, including prescription drug price controls that would harm American innovation in pharmaceutical research and development, redirecting state and local government healthcare spending, payment changes, and slowing the growth of medical costs.
Warren also factors in the elimination of health insurance companies’ administrative costs. After all, she would eliminate private health insurance, making the administrative costs a moot point. Virtually all of the more than 2 million people who work in the industry will be looking for new jobs, perhaps in the vastly expanded government bureaucracy that will be necessary to run her program. It’s also questionable whether health insurance companies’ administrative costs should’ve been factored into Warren’s estimate, as some, but certainly not all, of these costs are paid for by the federal government.
Democrats often talk about the administrative costs of private health insurance, but this is overblown. Administrative costs are more complex than they appear and are for services provided by a health insurance company, claims processing, marketing, and taxes, in addition to other things. Nearly 5 cents of every dollar spent on healthcare goes to taxes. Medicare’s administrative costs are very likely to be higher than 2 percent often cited by Democrats. A 2006 Milliman study found that those costs were 5.2 percent.
Using the Urban Institute’s $34 trillion estimate for Medicare for All as a baseline for the overall cost and factoring in the $13.6 trillion in cost reductions from her other proposals, Medicare for All would require $20.5 trillion in new federal spending over ten years. Like administrative costs, the projected savings from some elements of her plan cross over into NHE and are only partially paid for by the federal government. This misleadingly reduces the price tag of the plan. The already $20.5 trillion price tag that Warren claims is also likely wrong because of the expected increase in health spending under Medicare for All.
How does Warren plan to pay for Medicare for All? Well, there will be a lot of taxes and some defense spending cuts. In total, Warren plans to raise taxes and enhance revenues to the tune of $19.7 trillion. The remaining $800 billion would come from the elimination of the Overseas Contingency Operations (OCO) slush fund. The taxes that Warren has proposed to finance Medicare for all are in addition to other substantial tax increases that she has proposed during the course of her presidential campaign.
Using her campaign’s estimates, Warren had proposed $4.75 trillion in tax increases over ten years prior to rolling out the tax and revenue enhancement proposals to pay for Medicare for All. That $4.75 trillion -- which represents the repeal of the Tax Cuts and Jobs Act, the 7 percent surtax on corporate profits, and the 2 percent and 3 percent net-wealth tax -- doesn’t include other tax proposals that she has proposed, for which there aren’t estimates. (The revenue estimates in the graphic and elsewhere in this blog post are from Warren’s campaign. We have doubts that these proposals will bring in as much revenue as she claims.)
Warren is proposing a contribution from employers with 50 or more employees to Medicare. The proposal is that employers would add up their past three years’ total healthcare costs and divide that figure by their total number of employees. Employers would be required to remit 98 percent of that cost to Medicare.
Obviously, this is a tax. Now, under current law, employers can deduct their contribution to employees’ health insurance. Under Warren’s plan, employers would pay a massive tax, estimated at $8.8 trillion over ten years, and wouldn't be able to deduct the cost. If the revenues from the employer tax don’t meet estimates, another tax on businesses with high executive compensation and stock buybacks would kick in. The tax that employers will be required to pay will undoubtedly be passed on to employees. This means that middle-class workers will see their taxes go up, albeit indirectly.
Warren makes the assumption that the employees’ share of premiums would come in the form of ordinary wages and, thus, be subject to taxation. Her proposal also eliminates various savings accounts associated with healthcare, including health savings accounts (HSAs), and the personal deduction for medical expenses. She estimates that this would raise $1.4 trillion over ten years.
Another revenue stream Warren proposes is an expansion of her net-wealth tax. As currently proposed, Warren would impose a 2 percent net-wealth tax on tax-filers who have a net wealth between $50 million and under $1 billion and 3 percent on tax-filers who have a net wealth of $1 billion or more. She estimates that this will raise $2.75 trillion over ten years. President Barack Obama’s former economic adviser, Lawrence Summers, highly doubted revenues from such a tax would come even close to $2.75 trillion.
Indeed, the lack of revenue and administrative burdens are reasons why so many European countries have repealed their wealth taxes. To pay for Medicare for All, Warren would expand the net-wealth tax by an additional 3 percent for tax-filers who have a net wealth of $1 billion or more. She estimates that an additional 3 percent net-wealth tax will raise an additional $1 trillion, bringing the total tax increase under her wealth tax proposal to $3.75 trillion over ten years. She assumes a 15 percent avoidance rate, but the rate is likely to be higher, meaning the anticipated revenues won’t be met.
Another way Warren plans to pay for Medicare for All is through a mark-to-market system of taxation for capital gains income, excluding retirement accounts. The proposal would end the preferential tax rates for long-term capital gains and tax them annually rather than at the time of sale. Warren estimates that this will raise revenue by $2 trillion over ten years.
Warren plans to increase enforcement of tax laws by the Internal Revenue Service (IRS) to close the tax gap, which, she assumes, will raise $2.3 trillion over ten years. Essentially, this is aimed at underreporting of income, underpayment of taxes, and non-filing of taxes. The Congressional Budget Office has estimated that increased enforcement of tax laws would only generate $55.3 billion between FY 2019 and FY 2028 (p. 306), but the net effect would be $35.3 billion because Congress would have to increase appropriations for the IRS by $20 billion to beef up enforcement.
There would be two new taxes on financial institutions. One is a 0.1 percent financial transactions tax on the purchase of stocks, bonds, other debt obligations, and securities and transactions involving derivatives. The other tax is a systematic risk tax on banks with more than $50 billion in assets. Together, these two taxes would raise $900 billion in revenue over ten years.
Warren would eliminate accelerated cost recovery. This is a tax deduction that allows businesses to recoup the cost of investments. This would raise revenues by $1.25 trillion over ten years. She would also impose a 35 percent country-by-country minimum tax. If a business pays a tax rate of 25 percent in another country, they would be required to pay 10 percent to the federal government, making their total tax liability 35 percent.
Finally, Warren claims that her immigration reform proposal would increase revenues by $400 billion over ten years. She would eliminate the Department of Defense’s Overseas Contingency Operations (OCO) slush fund, which would save $800 billion over ten years.
Individuals and businesses respond to changes in the tax code. One can’t look at changes in the tax code on a static basis. Simply because Warren expects a certain proposed tax to bring in large sums of money to federal coffers doesn’t mean it will. Taxes reduce investment and productivity, and, as a result, lead to lower than expected revenues. If Warren got her way, and all of her tax proposals were adopted by Congress, the economy would undoubtedly go into shock.