published Aug 27, 2018, 9:10:46 AM, by Karl W. Smith
(Bloomberg Opinion) —

Enthusiasm for expanding the government health-insurance program for the elderly to cover all U.S. citizens is growing among Democratic political hopefuls. According to Dylan Scott at Vox.com, “Nearly every single rumored 2020 candidate in the Senate has backed Senator Bernie Sanders’s Medicare-for-all bill.” The idea polls well and the vast majority of seniors are satisfied with their current care under Medicare.

The financing for such an ambitious program may derail these hopes. According to a study by Charles Blahous, a researcher at the Mercatus Center at George Mason University, Sanders’s proposal could end up costing the federal government at least $32 trillion over 10 years. Some of the cost of a Medicare-for-all plan would be offset by decreasing expenditures of states and private health insurers. Depending on how successful Medicare-for-all would be at negotiating lower prices — especially physicians’ fees — overall health spending could even decline under universal Medicare.

Still, there is reason to be concerned about the program’s price tag. Unless taxes are raised significantly, the program would radically increase the already sizable U.S. budget deficit.

Is that a problem? For nearly a decade I’ve been an extreme budget dove, arguing that, if anything, the deficit has been too low.

I haven’t changed my mind about that. I think that the government should have taken more dramatic measures to stimulate the economy after the 2008 recession. Though I tend to favor tax cuts over spending increases, either would have speeded the recovery.

Even today, with unemployment under 4 percent, the job is not quite done. The personal savings rate is high, but business investment is still well below its long-run growth trend. Similarly, while employment growth has been solid, millions of Americans who left the labor force during the downturn have yet to return.

The 2017 tax cut and jobs act should help spur investment and incentivize businesses to take a chance on workers who have been out of the job market for awhile. For that reason, it is well worth the roughly $1 trillion that it adds to federal deficits over the next decade.

Medicare-for-all would be a different story. By Blahous’s estimates, it would conservatively increase federal spending by an amount equal to 11 percent of gross domestic product each year. That’s a deficit impact well over 10 times that of the tax cut. Moreover, rather than stimulating job growth among the low-skilled workers who need it most, Medicare-for-all would increase the demand for highly trained health-care workers who are already well compensated and in short supply.

A program of this size simply can’t be financed by deficit increases. Any attempt to do so would lead to soaring interest rates, as the Federal Reserve would move to offset a potentially rapid increase in inflation.

Surging interest rates would depress private investment and lead to large increases in the value of the dollar. That would make U.S. companies less competitive internationally, so exports would collapse and the trade deficit would soar. Luckily, even under the weight of massive deficits the U.S., for now, is essentially immune to a full blown debt crisis. The dollar’s status as the international reserve currency gives the U.S. enormous latitude. And if faced with the prospect of default by the Treasury, the Fed would take steps to prevent that from happening, possibly by printing money to cover debt payments.

However, long before reaching that worst-case scenario, the economy would experience enormous dislocation. Blue-collar industries like agriculture, mining, construction, manufacturing and hospitality, which are most vulnerable to movements in interest and exchange rates, would feel the brunt of it.

If deficit spending can’t safely finance Medicare-for-all, then the alternative would have to include large federal tax increases. Reversing the recent tax cuts wouldn’t go far enough. Nor would returning tax rates to those that prevailed under President Bill Clinton.

In the year 2000, the U.S. government collected taxes equaling 19.7 percent of GDP, the highest level since 1945. The Federal Reserve’s data only go back to 1929, but it’s unlikely that the government ever collected more than 20 percent of GDP in taxes. To fully fund Medicare-for-all, that figure would have to rise to more than 30 percent of GDP.

To complicate matters, the government has increasingly relied on high-income earners for tax revenue. Tax cuts, typically championed by Republicans, have tended to provide at least some relief to earners at all levels. On the other hand, tax increases, more often implemented by Democrats, have tended to raise taxes primarily on upper-income households.

The result is that the average federal tax rate on the middle quintile of taxpayers declined from 19.4 percent in 1981 to 14 percent in 2014, the last year the Congressional Budget Office offers distributional analysis. By contrast, the average tax rate paid by top quintile of taxpayers increased by one-tenth of a percentage point, from 26.6 percent in 1981 to 26.7 percent in 2014.

Even including payroll taxes, the lowest fifth of taxpayers paid less than 2 percent of their income in net taxes to the federal government in 2014. In and of itself, this isn’t a problem. It represents the commitment to a progressive tax schedule that both parties, despite the prevailing rhetoric, have shown over the last 40 years. It does, however, present a heavy lift for Medicare-for-all.

Medicare is currently financed by payroll taxes. Funding Medicare-for-all in a similar fashion would require a substantial rise in federal taxes paid by taxpayers in the lowest quintile. Some of this might be offset by a decrease in state taxes, as Medicare-for-all replaced the health-insurance plan for poor people, Medicaid, which is costly for states. At the same time, however, many lower-income households are already covered by Medicaid and so would see only a small benefit from Medicare-for-all.

Sanders’s office estimates that raising federal tax rates on the wealthiest Americans to 52 percent, and ending favorable tax treatment for capital gains and dividends, would cover just 5 percent of the cost of Medicare-for-all.

The simple fact is that financing Medicare-for-all would require a dramatic shift in the federal tax structure and a substantial tax increase for almost all Americans.

The negotiations over how to structure that increase would be intense. Political trade-offs are implicated in virtually every choice. Further limiting tax deductions, for example, would harm upper-middle-class blue-state residents with expensive housing. Introducing a broad-based value-added tax could raise substantial revenue at relatively low rates, but would hit senior citizens the hardest. Taxing carbon emissions could generate revenue while pursuing environmental objectives, yet they threaten the rapidly growing oil and gas industry.

Massive expansion of the tax system requires sober and careful negotiation that the fractured U.S. political system cannot handle.

Karl W. Smith is a senior fellow at the Niskanen Center and founder of the blog Modeled Behavior.

To contact the author of this story: Karl W. Smith at modeledbehavior@gmail.com
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