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The Magical Thinking Behind Warren’s Medicare for All Plan

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The Magical Thinking Behind Warren’s Medicare for All Plan

The Daily Beast November 1, 2019
Health PolicyMedicare/Medicaid

She deserves credit for finally producing a plan for that. But even if the numbers added up—and they don’t—it might well tank the American economy.

Sen. Elizabeth Warren Friday fulfilled her pledge to propose a specific plan to finance Medicare-For-All. She deserves enormous credit for abandoning her earlier dismissals of the $30 trillion financing question and producing a plan that spells out the required new taxes. However, promising to shield middle-class families from new taxes forces Warren to propose an unrealistic level of health-care savings, as well as new taxes on businesses and investors that are nearly unprecedented in the modern economy. A more realistic accounting of this plan would likely leave a substantial funding hole even before the questions about how the economy would respond to this avalanche of taxes.

Before diving into the plan itself, it is worth noting that the current Medicare system already faces a surging annual cash shortfall that is projected to total $44 trillion over the next 30 years–plus an additional $28 trillion in resulting interest costs–that will need to be financed with general revenues. Warren’s standard of “paying for” Medicare-For-All refers only to financing the additional federal costs of her new proposal. It would not reduce the federal government’s current health care deficits that are already driving long-term federal deficits. And in fact, the large Medicare-For-All taxes would leave few remaining options to close this baseline gap. Perhaps candidates should figure out how to pay for the current Medicare system before expanding it.

Let’s begin with the big picture. Total national health expenditures are currently projected at $52 trillion over the next decade. In nationalizing all of these costs, the Warren plan first applies the $16 trillion that Washington will already spend on programs like Medicare and Medicaid (which, as stated above, are funded in part by escalating budget deficits), as well as the $6 trillion that state and local governments currently spend on Medicaid, CHIP, and government employee premiums. That leaves a remaining budget hole of $30 trillion.

Yet Warren assumes that only $20.5 trillion in new federal resources will be necessary—and that efficiencies can cover the baseline $9.5 trillion gap as well as new health care utilization costs that could reach $7 trillion. This is extraordinarily optimistic. Analysts across the political spectrum–from the Urban Institute on the left to the Mercatus Center on the right–have concluded that a generous Medicare-For-All system with no premiums or co-payments would actually increase national health spending. The cost of higher demand and utilization would exceed the savings from reduced payment rates and administrative efficiencies.

Instead, Warren assumes substantial net savings that far exceed what most analysts consider plausible. For example, her plan assumes $1.2 trillion in savings from bundling payments, even though studies have shown that this approach has not produced savings. And it assumes that administrative costs would be nearly two-thirds lower than the significant savings assumed by the Urban Institute. While some administrative savings are likely to offset some of the new demand and utilization, producing net savings of nearly $10 trillion is highly unlikely.

From there, the $20.5 trillion in proposed federal budget savings are ambitious, yet ultimately unrealistic and economically destructive. Warren would raise $8.8 trillion from essentially having employers pay a Medicare payroll tax equal to 98 percent of what they were already paying in employee health premiums for the past three years. This is a creative approach to avoid the redistributive issues created by applying a universal employer payroll tax rate. However, even employer payroll taxes are a tax on employees, who ultimately bear the burden out of their compensation. Additionally, this policy essentially punishes employers who had been offering more generous health benefits by locking them in to those higher costs (although the plan hints that eventually the tax rate would be standardized). Employers may respond to this proposal by reducing their employee health care coverage, in the hope that by the time this policy is enacted sometime in the future, their current three-year premium costs (and thus their new tax) would be lower.

In order to shield most workers from new taxes, Warren’s plan would impose a historic tax increase on businesses and investors. Corporations would not only see their tax rate rise back to 35 percent—returning them to the highest rate in the developed world—but multinational companies would face an immediate 35 percent tax rate on their profits in other countries with no ability to defer the taxes. So an American company with a branch in England would pay an immediate 35 percent tax rate on its English operations, while competing against multinational companies from other countries that are paying only the English 19 percent tax rate. Rather than face a level playing field, American companies would struggle to compete with significantly higher taxes than their competitors. This would surely accelerate the number of American companies relocating abroad.

American businesses would also face steep new taxes on their investments in new equipment. Investors would face capital gains tax rates as high as 43.4 percent—while continuing to be taxed on inflation along with their “real” capital gains. This likely exceeds the revenue-maximizing tax rate. Additionally, wealthy investors would pay capital gains taxes each year on their incremental gains, rather than waiting until the investments are sold. The flip side of that policy is that a year of stock market declines would leave the IRS subsidizing wealthy investors whose portfolios have declined in value, leading to wild fluctuations in federal revenues. The proposal would also impose a tax on financial transactions, and a large fee on financial institutions.

While Warren claims no middle-class tax increases, virtually all economists would agree that much of these new business taxes would be passed on to workers and consumers.

Next, the plan would expand her proposed annual wealth tax rate to 6 percent for billionaires, claiming an additional $1 trillion in revenue. Yet Larry Summers, the former Treasury secretary under President Bill Clinton and top economic adviser to President Barack Obama, has estimated that Warren’s previous wealth tax proposal would raise just one-seventh of the claimed revenue. Most European countries have repealed wealth taxes because they raise little tax revenue, while introducing enormous complexity and economic losses. Furthermore, the proposed 6 percent tax rate–on the same stock of wealth each year–is virtually unprecedented globally, and would force many entrepreneurs to sell portions of their businesses (where their wealth is typically located) in order to pay the annual tax bill.

Imposing one or two of these large new tax proposals on businesses and investors would burden the economy. Piling all of them on top of each other would substantially reduce business investment and competitiveness, taking much of the new aspirational tax revenue with it.

Most Americans will surely support Warren’s proposal of stronger IRS tax enforcement and more taxpayer audits on the wealthy, yet the assumption that this will bring an additional $2.3 trillion in revenues over the decade is highly optimistic. Her proposal to bring in $400 billion in new tax revenues by expanding immigration levels is highly unlikely to be enacted. The plan claims $800 billion in defense savings over the decade—which would leave the defense budget at 2.7 percent of GDP, the lowest since the '30s—from eliminating the fund for Middle East operations. However, much of that fund now subsidizes regular defense spending, and these cuts will require a more specific plan.

This piece originally appeared at The Daily Beast


Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

Photo by Alex Wong/Getty Images