Warren's $21 Trillion Plan: Big, Bold... and a Loser?

Senator Elizabeth Warren has a plan: a $21 Trillion plan to pay for Medicare for All that may win her the Democratic primary but cost her the general election.

Warren should get high marks for being straightforward (finally) about how much Medicare for All would cost and how she would pay for it. Warren’s plan is remarkably detailed and thoughtful, particularly for a politician who is a serious candidate for President.

However, her funding proposal is also a radical document. Her plan gives Donald Trump and other Republicans a lot of ammunition for attacking Democrats as “socialists” who want to raise taxes and vastly expand the federal budget. The Republicans could not wish for a better Christmas gift.

Single-Minded Focus on Single Payer

The irony is that voters were not clamoring for a single-payer, Medicare for All system when this election cycle started. A majority of Americans support universal health care coverage; they want to expand the protections and subsidies provided by the Affordable Care Act. But voters’ reactions to a single-payer proposal are more complicated, particularly if they are asked if they are willing to pay higher taxes to support such a system.

Furthermore, several European countries have achieved universal health care coverage with a mix of public programs and private insurance plans. That’s the case for The Netherlands and France, among others. Adopting a single-payer model is not the only route to giving all citizens access to good medical care. Eliminating all private health insurers is not a prerequisite to achieving that goal. So why does Warren insist on ending any role for private insurers…and their 550,000 employees?

Early in the presidential campaign, Warren began to outflank Sen. Bernie Sanders on the left, so that she could appeal to the young, progressive voters who had flocked to him in 2016. Her embrace of his Medicare for All idea was brilliant, tactically, and has helped her to surpass Sanders in most polls.

But Warren has also boxed herself in on the health care issue. Some Democratic strategists have theorized that Warren could soften her stance on Medicare for All after winning the Democratic nomination, so that she could broaden her appeal to moderate voters. Really? That would be like Donald Trump declaring that he’s now in favor of open borders.

Huge Increase in Federal Spending on Health Care

Under current law, the Federal government spends about $1.1 trillion a year on health care (Medicare, Medicaid, and veterans). The cost estimates for Medicare for All vary, but the lowest predicted increase would be $1.1 trillion; federal spending on health care would double. However, the average estimate is for the Federal health care budget to jump by $2.5 trillion to $3.6 trillion…a 230% increase.

To put those numbers in context, the Federal Budget is about $4.5 trillion at present. Medicare for All would be an enormous expansion of federal spending—roughly 55%--as the government replaced private insurers and set prices for the health care industry, which constitutes about 20% of our economy.

Much of the increase in the Federal budget would reflect shifting dollars around, as employers and states paid their insurance premiums to the national government rather than to private insurers. But Medicare for All would still entail a drastic increase in the federal budget and require about 30% in new tax revenues, under Warren’s plan.

In addition, some of Warren’s cost and revenue assumptions are debatable. She forecasts generating $2.3 trillion through better tax collections and $400 billion in taxes from newly legalized immigrants (after passing immigration reform, of course). Her projected revenue shortfall could be low, but we’ll leave that topic for another day.

…When the Deficit’s Already Enormous

Furthermore, federal revenues are $3.5 trillion. The Federal government is now running a deficit of about $1 trillion, mostly because of Trump’s irresponsible tax cuts enacted in 2017. The gap is 6% of Gross Domestic Product, which is unprecedented during a healthy economy. No one in Washington seems to worry about this huge deficit at the moment, but it is not sustainable and will have to be addressed.

This is not to say, as Republicans do, that we have to slash social spending to eliminate the deficit. However, Democratic leaders should be realistic about returning the deficit to a more reasonable level, such as 3% of the economy, and that will require raising some taxes. Reducing the deficit is a real-world constraint, not a Republican talking point, on launching massive new social programs.

$10 Trillion in New Taxes Over 10 Years—a 30% Jump

In her quest for the $20.5 trillion to fund her plan, as President, Warren would have to come up with a cool $10 trillion in new taxes over 10 years-$1 trillion a year. That would mean a 30% increase in federal revenues (taxes) per annum, assuming her estimates are on target and her assumptions pan out. If not, it could be higher.

The senator has pledged, many times, that she will not raise taxes on the middle class to fund the expansion of Medicare. That narrows her options considerably.

Here's a problem: at current tax rates, it’s hard to argue that most of the top 1% of taxpayers don’t “pay their share”, as a percentage of their income relative to other voters. Warren could have proposed raising all income tax rates to fund Medicare for All, but she decided not to do that. Or she could have proposed raising the income tax rate for the top 1% to 35%, say, from 30%. She did not do that, either, presumably because the numbers would not have worked.

Instead, Warren would impose a variety of higher taxes on corporations, the top 1% of taxpayers, and billionaires. Let's focus on four key proposals, which will probably generate intense opposition…and not just from Republicans.

Warren would “restore” the corporate tax rate to 35% from 21% (raising $2.9 trillion) and she would levy penalties on companies that try to shelter their earnings in low-tax countries. However, Sen. Chuck Schumer and other mainstream Democratic leaders agreed with Republicans in 2017 that U.S. corporate tax rates were too high and put American firms at a competitive disadvantage. They were prepared to reduce them to the mid-20 % range. Warren’s off the reservation on this issue.

Sen. Elizabeth Warren

Soaking the Rich...and Not-So-Rich

Warren would eliminate the capital gains tax rate (20%) on investments for the top 1% of Americans, taxing the gains at the same rate as ordinary income (30% plus). She would also tax them on any capital gains they accrued, even if they did not sell the investments. These two changes would raise $2 trillion.

These proposals may resonate with Democratic progressives, but if you want to alienate moderate Republicans and independents, and even some moderate Democrats, this is a good way to go about it.

Despite some flaws, the U.S. tax system remains fairly progressive, even based on estimates from Warren’s economic advisers. The top 1% of taxpayers, as a whole, already pay a 30.1% tax rate on their income. That is a higher rate than the top 10%’s 29%, the next 40%’s 27.6% and the bottom 50%’s 24.2%. That’s partly because higher-income taxpayers pay a 3.8% surcharge on their investment income to fund the Affordable Care Act. They also pay higher Medicare premiums.

So the new capital gains rule would be a back-door way to raise taxes on the 1% without changing their income tax rate. In particular, taxing unrealized gains could create problems for some voters. What happens if some stocks rise during the calendar year, triggering a tax gain, but they fall before April 15, when you have to pay your taxes? What if you don’t have the cash on hand…do you have to sell some stocks to pay Uncle Sam?

And for affluent but not rich Americans, owning stocks for the long-term is a key way to build some wealth. The ability to defer taxes until you sell the stock is a crucial factor in those investment returns. (Warren’s proposal would exclude stocks held in retirement accounts.)

Doing a Sanders on Billionaires

Life at the tippy top is different. The top 0.1% of taxpayers pay a 29.4% rate on their income, so an increase on that bracket would seem in order. The real offenders are the 400 richest Americans, who pay only a 23% tax rate. But taxing that small elite’s income alone might not generate enough new revenue.

As a result, Senator Warren would increase her proposed wealth tax on billionaires to 6% from her initial 3% (raising $1 trillion). She blithely asserts that the S&P 500 generates 10% returns per annum, so the new tax won’t be a burden. However, the average return on investments is more like 5%. You may not feel much sympathy for billionaires, but with this proposal Warren is moving toward Sanders’ idea of deliberately reducing their net worth. This proposal could be confiscatory.

Making Wall Street Pay Up-$900 Billion

Warren undoubtedly knows that there is a limit to how far she can squeeze the rich. To make up the shortfall in revenue, she turns to an old target: Wall Street bankers and traders. Warren would raise $900 billion from the financial industry, in two ways. She would impose a “financial transaction tax” on purchases of stocks, bond and derivatives ($800 billion). The tax would only be 0.1% of the value of the security…so no problem, right?

Warren would also levy a “systemic risk” fee on the liabilities of banks with more than $50 billion in assets, i.e., the 40 largest banks in the country ($100 billion).

First, there is a question of fairness: why should one particular industry be assessed a special tax to fund Medicare for All? Particularly since most banks, unlike industrial companies, pay the full corporate tax rate, as they don’t have many assets to depreciate?

There’s a second problem: Warren has never shown a deep understanding of corporate/ investment banking and trading. (The senator has studied consumer lending in depth). She has not acknowledged that since the crisis, banks have been required to hold much more capital and drastically reduce their risk-taking in trading. Warren’s fighting the last war in this regard.

Investment banks mostly buy and sell securities on behalf of their customers. Wall Street firms no longer take huge bets on trading positions and swing for the fences; that’s prohibited by regulations. Trading has become primarily a low-margin, high volume business. A tax of 0.1% on trades may seem like peanuts, but if it were enacted, banks might not make money on most trading. They would have to charge their clients more..or drop lower-volume clients. Either result could depress the level of trading activity and make markets less efficient. That would be bad for the economy and companies that want to raise capital, not just Wall Street.

Warren’s plan is ambitious and detailed. The former law professor, a life-long academic, has written a thought-provoking term paper, though it has some flaws and the numbers don’t quite add up.

But is it a blueprint for getting elected…or a disaster in November 2020?

The Wall Street Democrat