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Economic Analysis: Warren’s War on Wealth and Health

Posted on Nov. 11, 2019

Pajama Boy didn’t buy health insurance.

A central premise of Obamacare was that insurance premiums and provider costs would decrease when the insurance pool was expanded to include young, healthy, low-cost participants. That didn’t happen.

Pajama Boy was the star of a 2013 Obamacare advocacy ad posted on President Obama’s Twitter account. His real-life equivalent couldn’t afford the premiums for an individual plan on a state Obamacare exchange, in part because the mandatory plans were so elaborate that they were costly even after the subsidies. Most of the roughly 10 million people purchasing on exchanges were subsidized. But Pajama Boy stayed in mom’s basement and paid the penalty tax instead — which for him was a mere $75. The IRS says 4.7 million people paid the penalty tax in 2017; more than half had incomes under $50,000.

What’s that got to do with Sen. Elizabeth Warren’s Medicare for All plan? The Democratic presidential candidate from Massachusetts proposes to get everyone into the insurance pool by prohibiting private health insurance. You read that right.

Warren would make the government the sole purchaser of medical services. At the moment, the government buys one-third of all medical services through Medicare (64 million participants) and Medicaid (66 million participants). Roughly 180 million people get medical insurance through their employers — an idiosyncratic tradition rooted in World War II wage and price controls.

Obamacare left roughly 30 million people uninsured; that’s about equivalent to the population of Texas. Many of the uninsured are wage earners whose wages are too high for Medicaid, but their employers are too small to be subject to Obamacare’s employer mandate. Obamacare expanded Medicaid, covering an additional 12 million people, but some states, like Texas, opted out (Medicaid is a federal-state program).

Warren says her plan would cost $52 trillion over 10 years. That’s more than the entire federal budget for that period (even with off-budget military costs added back). That’s equivalent to all U.S. health spending for a 10-year period.

So Warren proposes to reorganize the entire healthcare delivery system and the entire tax system to cover 30 million uninsured people because Pajama Boy didn’t buy an individual policy.

How’s that again? What’s wrong with Obamacare that can’t be fixed? The Warren plan makes no sense to former Chicago mayor Rahm Emanuel, who was White House chief of staff when Obamacare was enacted, or House Majority Leader Nancy Pelosi, D-Calif., who shepherded the bill through the House and famously remarked, “We have to pass this to find out what’s in it.”

It’s entirely possible that Warren doesn’t mean a word of her plan and is just trying to get votes from young people (who are sticking to Sen. Bernie Sanders, I-Vt., recently endorsed by the Squad). Loads of things she says shouldn’t be taken literally. Wall Street supporters appear to be counting on her not meaning a word about Medicare for All, which is unlikely to be enacted even if control of the Senate were to change.

Warren is also politically tone deaf (she’s in regular contact with Hillary Clinton). She put out her plan during the annual enrollment period for both Obamacare and Medicare participants’ private alternative, Medicare Advantage. Like your health insurance? Warren proposes to take it away! But don’t worry, you won’t have to pay!

This article analyzes Warren’s proposed tax increases to pay for her Medicare for All plan. Most of them are off-the-shelf ideas previously proposed. We will give special attention to her employer Medicare contribution (EMC), which is an entirely new animal.

Background

Medicare itself isn’t even what the proponents of Medicare for All think it is, because Medicare permits private alternatives, former Maryland Rep. John Delaney, a Democratic presidential candidate, pointed out. Medicare for All would not permit private alternatives.

Pajama Boy
Pajama Boy's real-life equivalent didn't buy an individual Obamacare policy.

Warren introduced her plan on her campaign website. There she told us to start with Sanders’s Medicare for All Act, S. 1129, of which she was a cosponsor. “The bill provides a detailed proposal for how to achieve our end goal. But as economists and advocates have noted, the legislation leaves open a number of key design decisions that will affect its overall cost, and the bill does not directly incorporate specific revenue measures.”

So what does Warren plan to spend on? Highlights include Medicare reimbursement at 110 percent of the current rate for some providers like rural hospitals. She would increase reimbursement for general practitioners and lower reimbursement rates for what she calls “overpaid specialties.” Yup, the Urban Institute thinks oncologists, radiologists, and heart surgeons are paid too much.

Readers, every year Congress votes to “cut” Medicare spending, and every year it goes up. Specifically, every year that Congress votes to cut the level of reimbursements to private doctors voluntarily participating in Medicare, it fools itself that this will slow the rate of spending increases, and every year total Medicare spending increases. Meanwhile, doctors drop out of the program. Doctors are not compelled to participate.

Warren plans to cover 331 million people, including unauthorized aliens (the official count of which is 11 million; most observers double or triple it). Under the Sanders bill, Medicaid would end, but states would be required to redirect $7 billion that they spend on the program (mostly for long-term care) and their own employees. For smaller states, Medicaid is the largest item in their budgets. Medicare and the Children’s Health Insurance Program as special programs would cease to exist under the Sanders bill.

The Sanders bill would create a universal entitlement for all residents of the United States, with the power given to the Health and Human Services secretary to provide benefits to other individuals. The secretary, currently Alex Azar, would also be empowered to prevent people from coming into the country solely to obtain medical care. HHS has to make procedures for enrollment and issue universal Medicare cards (current Medicare has cards).

Warren says she would give these residents “full” healthcare as well as vision care, dental care, and long-term care. The Sanders bill coverage is extensive, comparable to Medicaid, in that it covers things like transportation and long-term care. Warren says people will not be stuck in provider networks, which Obamacare policies used to reduce costs. The Sanders bill would allow individuals to obtain care from any provider qualified to participate, defined as state-licensed practitioners, who would have to sign participation agreements.

The Sanders bill would prohibit private insurance as duplicative. It would be unlawful for a private insurer to sell, or an employer or employer plan to provide, duplicative coverage. But insurers could sell coverage for the federal gaps. Readers, even the British system, the granddaddy of single-payer systems, doesn’t do this. Rich people have private insurance and private care. Oh, but that’s two-tier medicine! Americans have numerous tiers, as Warren recognized when she promised that people with better deals, like union members, would not be harmed.

What was wrong with Obamacare again? Warren said the current number of uninsured is 24 million and that 63 million are underinsured, even though Obamacare policies had a lot of bells and whistles, plus no spending limits. Upper limits and underwriting were made illegal in the Patient Protection and Affordable Care Act.

Obamacare was supposed to create competition among providers and insurers. It didn’t. Some states have only one insurer. Mergers reduced the number of large national insurers to a number so small that Azar could assemble the chief executives at a small conference table and yell at them. Why doesn’t he do that?

But Warren promises to restore competition. Hospital mergers will be scrutinized. She actually did say in her introductory blog post on Medium that “because everyone has good insurance, providers will have to compete on better care and reduced wait times in order to attract more patients.” Readers, gunshot victims do not choose their emergency room. There is no shopping.

Other single-payer systems control prescription costs by negotiating with pharmaceutical companies, using the threat of delisting their drugs if their price is not met. These systems also refuse to purchase drugs that their medical evaluators conclude have only marginal benefit. By law, the U.S. government does not negotiate drug prices, even though it could, right now, as the largest purchaser. So U.S. payers end up footing the research bill. Warren promised to adopt the excise tax mechanism described in the Lower Drug Costs Now Act, H.R. 3, to bring domestic prices down to world prices. She also threatened compulsory licensing.

Under the Sanders bill, the HHS secretary would be empowered to establish patient cost-sharing for prescription drugs and biological products. Miracle biopharmaceuticals can cost hundreds of thousands of dollars. Herein lies the rub in single-payer systems. People always want more; “health” is cultural. When the United Kingdom established the National Health Service, it was exhausted from two world wars. The NHS was triage for an unhealthy population (triage is a military term for rationing). It was never meant to pay for liver transplants for drunks (a real dispute a few years back). But now it’s under financial strain from patient demand for more services.

Americans demand everything, even though most private and public systems are set up to say no to some things. The Sanders bill provides for “no.” As in other single-payer systems, the HHS secretary would be empowered to refuse to cover experimental services and drugs, with a right of appeal for patients. No sooner did Oregon institute triage than it was faced with public demand that a child with a rare, expensive terminal disease be treated, causing the entire restricted list to be discarded. The Sanders bill provides for a beneficiary ombudsman and antiabuse rules.

Meanwhile, Medicare Advantage is a popular success. The private alternative currently covers one-third of all Medicare participants, half of whom pay no premium and most of whom get drug coverage. Here’s the punch line: Use of this alternative is even higher in the battleground states like Florida and Pennsylvania. Healthcare was an issue in the 2018 election, and it will be an issue in 2020. Warren is facing people who like their current arrangements. Meanwhile, the president is telling older voters that Warren would take away Medicare.

How would Warren square her plans with the federal budget? Before we get to the taxes, the Sanders bill would create a national health budget and a trust fund on the federal books for medical benefits. A trust fund would be a sneaky form of cap on what would otherwise be an unlimited commitment. Although future cuts to benefits would be politically difficult, the trust fund mechanism would excuse cuts when congressional estimators inevitably declare that the fund is going broke. Where have we heard that one before?

Warren mentions overseas contingency operations as an alternative funding mechanism. OCO is off-budget military spending that is essentially monetized. Warren griped that this ostensibly temporary mechanism is being misused for whatever the military wants. She proposed to count savings toward her plan by reducing OCO and budgeted military spending by calling for ending endless wars and reducing military presence in the Middle East — the president’s calls for which have been rebuffed by her own party and his.

View From 10,000 Feet

What’s most remarkable about Warren’s proposals is the mind-boggling immensity of change she seeks. These changes are summarized in Table 1. As shown at the top of the table, her tax plans were highly ambitious even before she released her explanation of how she would pay for Medicare for All on November 1.

Table 1. Summary and Estimated Revenue Effects of Sen. Elizabeth Warren’s Tax Proposals

Proposal

2020-2029 Revenue Effects of Warren Materials

Warren Tax Proposals NOT part of “Medicare for All”

(1) Ultra-millionaire tax (2 percent on wealth over $50 million, 3 percent of wealth over $1 billion)

$2.75 trillion

(2) TCJA repeal for wealthiest individuals and largest corporations

$1 trillion

(3a) 7 percent tax on “real” global profits

$1.05 trillion

(3b) Close TCJA international loopholes

$150 billion

(3c) End oil and gas subsidies

$100 billion

(4) Lower estate tax rates and lower thresholds (S. 3503)

$400 billion

(5) 14.8 percent tax on wages and investment income for taxpayers with income in excess of $250,000

$4.2 trillion

(6) Increase EITC and child tax credit

Minus $2.4 trillion

(7) 0.2 percent payroll tax (to fund paid leave) (cost probably about $150 billion)

Not available

(8) Increase excise tax on gun manufacturers

Not available

(9) Tax on lobbyists

Not available

(10) Unspecified carbon tax (CBO: $1.1 trillion)

Not available

Medicare for All Revenue Raisers

(1) Employer Medicare contribution

$8.8 trillion

(2) Additional take-home pay subject to existing taxes

 

(2a) Pretax employee health expense now taxed

$1.15 trillion

(2b) Repeal of HSAs, MSAs, deduction for medical expense

$250 billion

(3) Targeted taxes on financial firms

 

(3a) Financial transaction tax with 0.1 percent rate

$800 billion

(3b) Systematic risk fee on large financial institutions

$100 billion

(4) Taxes on large corporations

 

(4a) Eliminate expensing and accelerated depreciation of equipment, structures, advertising, and research

$1.25 trillion

(4b) Country-by-country minimum tax with 35 percent rate, no deferral, sales-factor apportionment, and exit tax

$1.65 trillion

(5) Taxes on top 1% of individuals

 

(5a) Increase billionaire wealth tax rate (above) from 3 to 6 percent

$1 trillion

(5b) Eliminate capital gains and dividends preference and tax on accrual basis

$2 trillion

(6) Improvements in tax enforcement to narrow tax gap from 15 to 10 percent, including increased IRS funding, more information reporting, and more international cooperation

$2.3 trillion

(7) Immigration reform that increases tax base

$400 billion

Summary Statistics for All of the Above

Total of specified revenue raisers (not in Medicare for All)

$8.6 trillion

Medicare for All raisers

$19.5 trillion

Total of above two

$28.1 trillion

10 years of GDP (CBO)

$263.1 trillion

Divide total by GDP

10.7%

Approximate current projection of federal tax to GDP (CBO)

17.5%

Total federal tax with Warren proposals

28.2%

Tax increase in percent (28.2/17.5 - 1 = 0.61)

61%

Sources: See notes at end of article.

In addition to a complete overhaul of the U.S. healthcare system that would make the Affordable Care Act look like small potatoes, she would largely repeal the Tax Cuts and Jobs Act; make additional fundamental changes in corporate, individual, and estate taxation and tax administration; and add at least two major new taxes, a wealth tax and a financial transaction tax (FTT). Because they are tax increases, and because Republicans will likely retain a Senate majority, the political opposition makes passage of any major component of her tax plan inconceivable. So Warren is only telling us what she would like to do.

A New $8.8 Trillion Employer Tax

Central to Warren’s efforts to pay for her healthcare plan is what she calls the “employer Medicare contribution.” This is a per-employee tax on employers. Puzzlingly, instead of doing what economically would make more sense and would be far easier to administer, it’s not a fixed amount per employee. It does not even vary by employee characteristics, which could make it more progressive, as Leonard E. Burman points out (Burman, “Warren’s Medicare for All ‘Employer Medicare Contribution’ Is a Distortionary and Regressive Tax,” Urban-Brookings Tax Policy Center (Nov. 5, 2019)). The per-employee amount of EMC is the same for all employees of a business, but varies from business to business. Please remember one of the cardinal rules of tax economics is that the economic burden of employment taxes is on employees even though the statutory burden is on employers (more on this assumption below).

The EMC would require every employer paying for healthcare today to pay per employee 98 percent of what they are projected to pay. (Warren’s campaign material likes to stress the 2 percent reduction in what employers would pay. We will ignore it here because it’s small and does not enhance our understanding of the essential aspects of the proposal. Also, under standard economic assumptions about incidence, it would not benefit the employer.) The projected amount in any year is (a) the number of full-time equivalent employees, multiplied by (b) an adjustment mirroring national healthcare inflation, multiplied by (c) the average per-employee expenditure on health (including the employer portion of premiums, administrative costs, and other health-related outlays) over the prior three years. Presumably this a fixed average for three years before enactment.

The most plain-spoken way to explain the problem with the mechanics of the EMC is that it’s unfair to employees who had generous employer-provided health insurance before it. Their employers paid more and — because of well-established principles of economics — these employees received lower cash wages than they would have otherwise because of the noncash compensation substitutes. With an EMC, employer contributions are basically the same before and after. The per-employee tax is set to roughly equal pre-EMC per-employee costs. (The difference is an employer is now paying the federal government instead of an insurance company.) So total employee compensation paid by an employer (wages plus health insurance) is unchanged. Take-home pay as described by Warren’s material is increased solely because the employees no longer have to pay their share.

Panel A of Table 2 provides a simple example of an economy with two employers, each with one employee whose productivity and effort earn $50,000 of annual compensation. Employer A provides blue-ribbon health insurance to which it contributes $9,000 of insurance premiums. Employer Z provides bare-bones health insurance to which it contributes $5,000 of insurance premiums. Assume also (to make the math easier) that both employees each contribute $3,000 toward their insurance premiums. As shown in Table 2, before the imposition of the EMC, the employee of A receives $12,000 of health insurance and takes home (assuming no other taxes) $38,000. The employee of Z receives $8,000 of health insurance and takes home $42,000.

Table 2. The Unfairness of the Employer Medicare Contribution

 

Total Compensation

Employer Contribution

Employee Contribution

Wages

Take-Home

Health Insurance

A. Effect of EMC With High-Cost and Low-Cost Employer-Provided Insurance

Employees before EMC:

Blue-ribbon (Employer A)

$50,000

$9,000

$3,000

$41,000

$38,000

$12,000 of private health insurance

Bare bones (Employer Z)

$50,000

$5,000

$3,000

$45,000

$42,000

$8,000 of private health insurance

Employees with EMC:

Blue-ribbon (Employer A)

$50,000

$9,000

$0

$41,000

$41,000

Medicare for All

Bare bones (Employer Z)

$50,000

$5,000

$0

$45,000

$45,000

Medicare for All

 

Contribution

Wages

Total Compensation

 

Employers before EMC:

Blue-ribbon (Employer A)

$9,000

$41,000

$50,000

 

 

Bare bones (Employer Z)

$5,000

$45,000

$50,000

 

 

Employers with EMC:

Blue-ribbon (Employer A)

$9,000

$41,000

$50,000

 

 

Bare bones (Employer Z)

$5,000

$45,000

$50,000

 

 

B. Effect of EMC With Average Cost Employer-Provided
Insurance and No Employer-Provided Insurance

Employers before EMC:

Average (Employer A)

$50,000

$7,000

$3,000

$43,000

$40,000

$10,000 of private health insurance

Nothing (Employer Z)

$50,000

$0

$0

$50,000

$50,000

No private health insurance

Employees with EMC:

Average (Employer A)

$50,000

$7,000

$0

$43,000

$43,000

Medicare for All

Nothing (Employer Z)

$50,000

$0

$0

$50,000

$50,000

Medicare for All

 

Contribution

Wages

Total Compensation

 

Employers before EMC:

Average (Employer A)

$9,000

$41,000

$50,000

 

 

Nothing (Employer Z)

$5,000

$45,000

$50,000

 

 

Employers with EMC:

Average (Employer A)

$9,000

$41,000

$50,000

 

 

Nothing (Employer Z)

$5,000

$45,000

$50,000

 

 

Now what happens as a result of this new tax? Assuming per-employee costs have remained steady, the employer will pay the same as it did before, that is, $9,000 for A and $5,000 for Z. Both employees’ total compensation stays the same ($50,000). There is no longer any employee-side insurance premium. But the problem is that the employee of A takes home $41,000 while the employee of Z takes home $45,000 even though they are both receiving the same health benefits. Both employees who deservedly were treated equally before are now treated unequally. Better-insured — and more likely unionized — employees like the worker for A are subsidized by the less-insured employees like the worker for Z. Indeed, Warren struggled to promise better-insured workers that they would not suffer under her plan.

The disparity will generally be even worse when considering employers with less than 50 employees. Under the Warren plan, these small employers would be exempt from the EMC unless they’re already paying for employee healthcare today. Panel B of Table 2 provides a simple example analogous to Panel A. Small employer A provides average health insurance to which it contributes $7,000 of insurance premiums. Small employer Z provides zero health insurance. The employee of small business A contributes $3,000 and the employee of small business Z contributes nothing. As shown in the table, before enactment of the EMC, the employee of A receives $10,000 of health insurance and takes home $40,000. The employee of small business Z receives no health insurance and takes home $50,000.

With the new tax, the employers will pay the same as they did before, that is, $7,000 for small business A and $0 for small business Z. Both employees’ total compensation remains $50,000. There is no longer any employee contribution for the employee of A. But the problem is that the employee of A takes home $43,000 while the employee of Z takes home $50,000 even though they are both receiving the same government-provided health benefit. Again, employees who were treated equally before (as justified by market conditions) are now treated unequally.

Now economists know that it drives many non-economists nuts to assume that all the tax burden imposed on employers is passed along to employees. True, economists are a bit cavalier with their incidence assumptions (which, they will privately tell you, they really don’t know for sure are accurate). Further, as common sense might also tell you, the tax burden is more likely to be passed along only after some time when markets adjust (and, in econo-speak, there is a new equilibrium).

But we don’t have to have a debate about that here. If you like, it could be assumed that some or even all the burden is borne by employers instead of employees. This would change matters, yes, but it would not correct the fundamental flaw with this proposal. If we assume, for example, that all the burden is borne by employees, the conclusion that the new EMC tax is unfair to workers across the board would disappear, but it would only be replaced by the conclusion that the EMC is nonneutral across employers, while it would ultimately promote an inefficient allocation of capital (as any burden on business would).

In three places in Warren materials it’s suggested that the EMC for some (or all? it’s not clear) will move toward a flat per-employee tax (that would only be adjusted for healthcare inflation):

[a] Over time, an employer’s health care cost-per-employee would gradually be shifted downwards (or upwards) towards the average health care cost-per-employee nationally.

[b] For new firms that exceed the small business threshold, the government would phase in a requirement to make Employer Medicare Contributions equal to the national average.

[c] Employers currently offering health benefits under a collective bargaining agreement would receive a discount on their Employer Medicare Contribution [but no more than enough to put EMC below national average] if they pass along an equivalent amount of the savings to workers in the form of increased wages, pensions, or other collectively bargained benefits.

To the extent these insufficiently specific mechanisms do move employers to a flat or national-average EMC, the unfairness portrayed in Table 2 would be diminished. But even after that, other issues remain. As the materials suggest, antiabuse rules would be needed to prevent gaming of the three-year base period amount. For the purpose of statement [c] above, some unavoidably imprecise mechanism would be needed to determine exactly how compensation changes would be measured that allows union employers to get a discount and how large that discount would be. And some complex mechanism would be needed for a provision in the proposal that would increase contributions (how much?) from highly compensated employees (how defined?) when legislated revenue goals (how and when determined?) from the EMC are not met.

More Employee Taxable Income

In addition to the $8.8 trillion of revenue from the EMC, the absence of the need for employers to purchase private health insurance is assumed to produce more employee taxable income for the system.

The assumption is that all employees are paying their share of the cost of health insurance through salary reduction elections in cafeteria plans. Under current law, if an employer offers a section 125 cafeteria plan, those wage amounts that employees elect to use to purchase benefits are exempt from income and payroll tax. Amounts electively deducted from paychecks for cafeteria plan health insurance are assumed to reappear in take-home pay.

Under Warren’s plan, no employer-provided insurance would be purchased. Thus wages electively applied to purchase health insurance would be subject to income and payroll tax, which Warren expects would raise $1.15 trillion. Similarly, under Medicare for All, deductions for contributions to health savings accounts and medical savings accounts, and for medical expenses in excess of 10 percent of adjusted gross income would be repealed. That’s expected to raise $250 billion.

Here’s how the Warren plan would work. Suppose an employee group medical premium is $100 per paycheck. The employer pays $75 and the employee elects to pay the remaining $25 through a cafeteria plan (that division is the national average). Under the Warren system, the employer would pay a per capita tax of 98 percent of $75, and the employee’s $25 election would be restored to taxable salary. That's where the extra trillion is assumed to come from.

Warren says that the restoration of the $25 to salary would be a raise for employees. Readers may wonder whether Warren has ever signed the front of a paycheck. The guiding assumption here is that once a cost of employment is removed, employers would substitute taxable cash wages in the same amount. But money is fungible. All employee benefits are paid out of the employee’s wages, no matter which party is the nominal payer. Employers wouldn't cut wages immediately in response to the changes, but in the long run, they wouldn’t raise wages by that amount either.

Warren made another extravagant assumption about $400 billion in new taxes that would be paid by another group of employees: unauthorized aliens who would be regularized and presumably work on the books afterward. Medicaid use is baked into the cake and Warren would require states to keep paying. Warren’s $400 billion is probably gross revenue, not net.

For this number, Warren relied on a Congressional Budget Office estimate for an immigration reform and amnesty bill, S. 744, that passed in 2013 and was never signed into law. That CBO estimate assumed that 10 million people would be new taxpayers. That number is comparable to the official estimate of 11 million unauthorized aliens present in the United States.

But don’t these people burden Medicaid and other federal programs? The CBO estimated that the new taxpayers would pay $456 billion in taxes over the 10-year budget period, even though the bill stated that payment of taxes could be a criterion for amnesty. But they’d use $275 billion of federal benefits. The CBO estimated that immigration reform would cost $23 billion to administer, so the new taxpayers would produce net revenue of $158 billion. 

No Romance for Finance

Directly from the CBO’s biannual laundry list of deficit reduction proposals, Warren includes in her plan two revenue raisers targeted at financial firms (CBO, “Options for Reducing the Deficit: 2019 to 2028” (Dec. 2018)). The more familiar is the FTT imposed on each trade of stock, bonds, derivatives, and other financial instruments. At a rate of 0.1 percent used by the CBO, the proposal is estimated to raise about $800 billion. Year-by-year amounts are shown in the adjacent figure. Notice the revenue loss in the first year.

We reviewed this tax before in the wake of the financial crisis when it was receiving more attention than usual. On the plus side, the tax could reduce speculative trading and high-frequency computer-assisted trading that is generally considered harmful. And because a lot of short-term market activity is nothing more than gambling, resources devoted to this parasitic activity should be reduced. On the other hand, liquidity provided by short-term trading can be beneficial to markets. The FTT could reduce this liquidity as well as raise the cost of capital. (Prior analysis: Tax Notes Int’l, Sept. 7, 2009, p. 791.)

Another concern with the FTT is that trading will just move offshore if such a tax is imposed unilaterally. The EU has made some start-and-stop progress on implementing this form of tax, but a worldwide FTT in countries that matter seems unlikely anytime soon, especially with rising nationalism. The CBO proposal allegedly gets around this problem by imposing the tax on U.S. taxpayers no matter where they trade.

Revenue Effect of Financial Transaction Tax

The second tax is a risk fee of 0.15 percent on the non-deposit, non-equity liabilities of financial institutions with more than $50 billion in assets. As described by the CBO, funds from this tax are supposed to go into a trust fund that could be used quickly during any future financial crisis. Warren does not assign funds to that purpose. Both these proposals suffer from the vagueness of the activity that they are trying to prevent, which is demonstrated in part by the inability of anybody to justify a particular rate for the FTT.

Big Money From Big Business

Warren proposes eliminating any immediate write-off of all types of capital spending, including equipment, structure, advertising, and research. Amortization of advertising and research have been prominent place-holding revenue raisers in Republican tax plans. And don’t forget, starting in 2022, the TCJA will require businesses to amortize their research costs over five years. But both proposals are ill-advised. Advertising really cannot be quantified. And expensing of research is justified on grounds that it significantly reduces administrative and compliance costs and that research spending generates positive externalities for the economy. The proposal is estimated to raise $1.25 trillion in the budget window. This is dishonest budgeting because as is well known by tax policy people, any deceleration of deductions is just a timing benefit with an estimated revenue gain that dissipates rapidly over time.

Warren is also proposing a country-by-country minimum tax with a 35 percent rate and no deferral — in other words, a pure worldwide system (assuming a domestic rate of 35 percent). Even with anti-inversion rules and a corporate exit tax, the pressure this would create for companies to establish residence outside the United States would be enormous. And that would be on top of her proposal to increase corporate rates (to some unspecified level) and to impose a 7 percent surtax on the worldwide income of multinationals. It’s tough to see how this all fits together. It would be difficult — some say, nearly impossible — to administer a minimum tax on a CbC basis. The United States would lose start-ups, and foreign corporations would in fact be able to grow at faster rates and out-compete U.S. corporations. Warren also proposes sales factor apportionment. The latest international proposals are expected to raise $1.65 trillion over 10 years.

Pillar 1 of the latest OECD efforts addresses source rules. Pillar 2 is concerned with design of a minimum tax. Presumably a Warren administration would be highly motivated to foster international cooperation on tax issues, so any minimum or sales-factor apportionment proposals would likely be subject to significant modification after the OECD issues its final work products in 2020.

Tax Wealth and the Wealthy

Warren has previously proposed a 2 percent annual tax on wealth in excess of $50 million with an additional 1 percent annual tax on wealth in excess of $1 billion. Professors Emmanuel Saez and Gabriel Zucman estimate that this proposal would raise $2.75 trillion over 10 years. The billionaires are rebelling already. As this article was being written, billionaire former New York City Mayor Michael Bloomberg was expected to file papers in Alabama to compete in the Democratic primary there.

As part of her Medicare for All plan, Warren would increase the 3 percent rate on wealth in excess of $1 billion to 6 percent. Saez and Zucman estimate that this modification would raise an additional $1 trillion. As several commentators have noted, these estimates are probably too optimistic because they assume levels of compliance and international cooperation that are not realistic. Warren also proposed to audit every rich household. (Prior analysis: Tax Notes Federal, Oct. 21, 2019, p. 398.)

Warren has also proposed taxing capital gains on an accrual basis and eliminating the preferential rates on dividends and capital gains. (Senate Finance Committee ranking member Ron Wyden, D-Ore., has proposed a similar plan for mark-to-market taxation of capital assets, without the rate hikes.) Although there is little doubt the wealth and income disparity between rich and poor is growing in the United States, and that the U.S. tax system does a lousy job of taxing the superrich (mostly because of the section 1014 tax-free step-up in basis at death), these proposals in combination are overreach.

To get a flavor of how these taxes may interact, let’s consider the fictional case of a fellow, call him Jeff, who owns $100 billion worth of publicly traded stock of a company called Nile. In year 1 of Warren’s world, he would pay $6 billion in wealth taxes. Assuming a 5 percent return on his capital (in the form of stock appreciation), he would also pay income tax of about $2 billion (equal to 40 percent of $5 billion). If the wealth tax were deductible against income tax, Jeff would pay no income tax. Of course, we don’t have that kind of detail yet. And if Jeff’s stock does not appreciate in value, there also would be no income tax. Why incorporate such pessimism into a forecast? As the revenue estimators of the FTT tell us, we can expect that tax to reduce stock prices and therefore revenue from capital gains. To whatever extent an FTT reduces stock prices, we can expect considerably larger declines from enactment of Warren’s proposals, including capital gains and dividend tax hikes, culminating in major corporate tax increases.

And that’s only the beginning of what would surely be significant micro- and macro-dynamic effects that would be included in official revenue estimates from Congress or Treasury. Who really knows what the magnitude of economic effects would be? But in general, we can say a few things. All the spending Warren would be doing offset by her tax increases would likely on net be demand-side stimulative to the economy as income is being redistributed down the income scale to folks who spend more than the wealthy taxpayers who are footing most of the bill. These effects are likely to be more predominant in the short run. On the other hand, you don’t have to be a protégé of Arthur Laffer to expect some significant negative supply-side effects. And they would likely be more predominant in the long run.

Moreover, frictions and uncertainty from such a massive (and rapid?) upheaval of the healthcare and tax system would impose other significant economic costs that are even less quantifiable than the direct demand and supply effect of the tax changes. Add this on to the especially uncertain geopolitical environment, and from an economic perspective you are playing with fire. Certainly no one would be surprised by a further slowdown in business investment (on top of what we are already experiencing) if the election of Warren was imminent and the passage of her proposals a real possibility.

IRS Turbocharged

Warren proposes an array of worthy improvements in tax enforcement including increased IRS funding, more information reporting, and more international cooperation. While the proposals are golden, the corresponding estimates are lacking. First, the official tax gap estimates from the IRS are unreliable. The data upon which they are based are way beyond their expiration date. Warren’s estimate is entirely based on this tax gap estimate. But let’s put aside that issue for a moment. Even if the tax gap estimates were rock solid, Warren’s estimates are fiction dressed up as analysis. Here it is: Take the tax gap estimates equal to 15 percent of total revenue that should be collected and divide by one-third to get 10 percent. That’s $2.3 trillion you cannot count on.

First, Do No Harm

Doctors no longer drive fancy European cars. Over the years, government purchasing, large employer self-insurance, and insurer second guessing have squeezed a lot of fraud, waste, and profit out of the U.S. healthcare system. Warren is trying to squeeze the last drops of excess cost and insurer profit out of it by removing and reorganizing the existing insurance for 310 million people.

Indeed, doctors are not an obstacle to government medical programs anymore. When socialized medicine was first proposed in the Truman administration, it was beaten back by the mighty American Medical Association. The average doctor in those days was a white man with a solo practice or a small partnership — a small businessman with a medical license. The representative doctor nowadays is likely to be receiving a salary from a large group practice. Women make up 35 percent of doctors.

Now the AMA advocates for improvements to Obamacare and recommends raising Medicaid eligibility to 133 percent of the federal poverty level. The AMA also suggests enhanced premium subsidies, federal reinsurance for state insurance pools, and buy-ins for Medicare and Medicaid. None of these ideas is catchy as a campaign slogan. But given that the uninsured comprise less than 10 percent of the population, attainable fixes should be tried before some vast, unpredictable overhaul of the system. Doctors don't bleed patients or put on leeches anymore.

“A single-payer option is not a viable solution, because it is a one-size-fits-all approach that would ultimately reduce coverage options and eliminate patients’ freedom of choice. It also would destabilize coverage for some 150 million people with insurance,” AMA President Patrice Harris wrote. “In determining the best way forward for the world’s largest health care system, we should recall the ethical imperative to ‘first, do no harm.’” 

References

Letter from Simon Johnson, Betsey Stevenson, and Mark Zandi (concerning financing of Medicare for All) to Sen. Elizabeth Warren, with appendix by Emmanuel Saez and Gabriel Zucman (Oct. 31, 2019).

Warren, “Senator Warren Unveils Proposal to Tax Wealth of Ultra-Rich Americans” (Jan. 24, 2019).

Warren, “I’m Proposing a Big New Idea: The Real Corporate Profits Tax,” Medium, Apr. 11, 2019.

Warren, “Protecting Our Communities From Gun Violence,” Medium, Aug. 10, 2019.

Warren, “100% Clean Energy for America,” Medium, Sept. 3, 2019.

Warren, “Expanding Social Security,” Medium, Sept. 12, 2019.

Warren, “Excessive Lobbying Tax,” Oct. 2, 2019.

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