The Plans for Medicare-for-All and Medicare-for-All-Who-Want-It: A Comparison and a Path Forward

A.  Introduction

The US health care funding system is a mess.  One consequence is that despite spending far more than any other country in the world for its health care system (about 18% of GDP currently, where the next highest country spends only about 12%), US health care outcomes are mediocre at best.  Among OECD member countries, only a few countries, with incomes well below that of the US (some countries of Central or Eastern Europe or in Latin America), have worse outcomes than the US in such standard measures as life expectancy or infant mortality rates.

Bringing this to the level of individual families, the Kaiser Family Foundation found (based on a survey of firms) that the average cost of an employer-sponsored health plan in the US in 2019 came to $20,576 for family coverage.  Of this, the share covered directly by the employer (as part of its overall worker compensation package) came to $14,561 (71%) while the worker paid via premia an additional $6,015 (29%).  For 2018, the figures were a total cost of $19,616, with $14,069 for the employer share and $5,547 for the employee share.  Median family income in 2018 (the most recent year available) in the US was $80,663 (Census Bureau estimate).  Adding in the employer share of the cost of the health plan to cash family income, the total cost of an employer-sponsored health care plan came to 21% of this expanded family income.

On top of this, a family will have to pay out-of-pocket the costs of deductibles, co-pays, co-insurance, and health care costs not covered under their insurance plan.  Milliman, a health care advisory firm, estimated that in 2018 such out-of-pocket costs were an average of an additional $4,704 for a family of four.  This would bring the total cost of health care for a family of four to $24,320, or 26% of expanded family income.  This is huge.  And the burden is of course proportionally larger for the 50% of the population with an income below the median.

Such a high cost for health care is in and of itself a giant problem.  But beyond this, not having effective access to the health care system, at whatever the cost, is even worse.  It can literally be a matter of life and death.

It should not therefore be a surprise that what to do about health care has become a prominent issue in the race for the Democratic nomination for the presidency in 2020.  While each candidate has his or her own specific proposals, most are grouped around one of two alternatives:  A single-payer Medicare-for-All plan, where Elizabeth Warren has released the most detailed proposal on what she would seek to do; and plans which would add a public option to the Obamacare exchanges, which has been dubbed Medicare-for-All-Who-Want-It by Pete Buttigieg, its most prominent proponent.

This blog post will review these two alternative proposals, focusing on the implications of each.  In addition, Elizabeth Warren has also released a detailed plan for what would be, under her proposals, a transition to a Medicare-for-All system during which she would add a public option to the Obamacare exchanges.  On the surface this would appear similar to the Medicare-for-All-Who-Want-It proposals of Buttigieg and others, but there are in fact important differences in the specifics.  After discussing the Warren Medicare-for-All proposal and then the Buttigieg Medicare-for-All-Who-Want-It proposal, this post will then review the Warren transition proposal and its differences with the Buttigieg plan.

To summarize very briefly, the implications of these different plans include:

a)  The Warren Medicare-for-All plan, while providing comprehensive and generous health care coverage for all in the US, would also imply massive shifts in how health care is funded.  Total costs would not rise (an increase due to the broader coverage would be offset, she argues, by efficiency gains of similar magnitude).  But the shifts in how health care would be funded are staggeringly large, potentially disruptive, and unrealistic in the view of many analysts.

b)  The Medicare-for-All-Who-Want-It plan, in contrast, need not in principle cost much.  A public-managed option added to the Obamacare health insurance exchanges could be priced to cover its costs, just as private insurers on the exchanges do now (along with their profits).  And indeed, a careful analysis by the Congressional Budget Office (which will be discussed further below) concluded that the overall impact of allowing a public option would reduce the fiscal deficit significantly, due to indirect effects that would reduce public expenditures while increasing public revenues.  However, the specific Buttiegieg plan goes further than just adding a public option, by increasing the health care plan subsidies significantly and providing them to a broader range of families and individuals than receive them now.  With this as well as other measures, Buttiegieg estimates his proposals would lead to increased federal spending, but of only $1.5 trillion over ten years.  This would be well below the $26.5 trillion shifted to federal spending in the Warren Medicare-for-All plan.

However, while a Medicare-for-All approach (such as proposed by Warren) would lead to everyone enrolled in a similar (and comprehensive) health insurance plan with funding through federal government sources, the addition of a public option to the Obamacare exchanges would lead to what would still be a highly diverse and variable set of health insurance plans, with very different levels of coverage and very different costs.  Some enrollees would pay relatively little (if they are young and healthy, or of low income) while others would pay much more (if they are older, or of moderate or higher income).  The health care funding system would remain fragmented, extremely complex, and with widely varying costs for different families and individuals.  And from such a starting point it would then be difficult to transition to a Medicare-for-All system, even if the overwhelming majority choose to enroll in the public option.

c)  Finally, while the Warren transition plan would add a public option at the start of the process, her public option would be of a health plan that is very different from the public option of Buttiegieg, Biden, and others.  Her proposed public option would be for an insurance plan that is similarly comprehensive to what she has proposed for her Medicare-for-All plan.  It would also then receive, from the start, a high level of subsidy, benefiting those who choose to enroll in that public option.  These subsidies would be funded centrally by the government.  The overall expense would depend on how many would choose to enroll in the plans, but with the comprehensive coverage proposed by Warren coupled with high subsidies, it would be foolish for most not to enroll.  While this would then provide a path to a compulsory Medicare-for-All system, the funding that would need to be provided would be large.

B.  The Elizabeth Warren Medicare-for-All Plan

Elizabeth Warren has presented the most detailed proposal for how her Medicare-for-All plan would be set up, and importantly also how it would be paid for.  Medical costs covered would be expansive in her plan, and include not only that 100% of the cost of the medical services that Medicare currently provides for would be covered (i.e. no deductibles, no co-pays, no co-insurance), but so would medical expenses such as for dental and visual services, and for prescription drugs.  This would be much broader than what Medicare as it currently exists covers, as Medicare has a deductible, limits on the number of hospital days covered, and generally covers only 80% of doctor services.  Furthermore, Medicare does not cover expenses for dental, visual, and certain other areas of care, and while Medicare Part D now covers certain prescription drug costs, there are limits on how much it pays.

This expansive coverage is similar (indeed probably identical) to what Senator Bernie Sanders has proposed.  But while Elizabeth Warren has presented a detailed plan on how the costs of the expansive health funding program would be covered, Bernie Sanders has not.  Rather (at least as of this writing) Sanders has made available a six-page note titled “Options to Finance Medicare for All”.  But while the alternative funding sources outlined in that note are presented as options from which to choose, if one adds up the estimated amounts that would be raised by summing up all of the options presented the total of $16.2 trillion over ten years would not suffice to cover the costs of his Medicare-for-All program.  As we will see below, the shift in health care spending to the federal government, even after an assumed $7.5 trillion in savings through various measures, would come to $26.5 trillion over ten years.

We will therefore focus on the Warren plan, although on the cost side the figures would be similar to what Sanders has proposed.  And there will be a lot of numbers.  The key issue for the Warren (and Sanders) plans is that the dollar amounts involved are massive.  It is important to stress that this does not mean health care costs will be higher (other than certain costs from the increased access, to be offset by savings from several reforms), but rather that there will be shifts (and massive shifts) from how these costs are covered now to how they would be covered under the Medicare-for-All plan.

To see these shifts, it is best to start from estimates of what national health care expenditures would be should the US keep the current system.  A ten-year period is being covered (as is standard in most budget analyses), and for the purpose of this exercise the Warren team has come up with estimates of how those costs would then change if their plan were fully in place for the years 2020-29.  This is of course notional, as the full Medicare-for-All plan was not in place on January 1, 2020.  But use of the 2020-29 period is reasonable to demonstrate what would happen under such a plan, as reasonable estimates can be made for such a period.

For what health expenditures are expected to be under current law, most US analysts use the detailed forecasts provided each year by the professional staff at the Centers for Medicare and Medicaid Services (CMS).  The most recent National Health Expenditure (NHE) projections, covering the period 2018-27, were released in February 2019, and the figures presented below are based on Table 16 of that set of forecast tables.  The NHE projections stop at 2027 and hence do not include 2028 and 2029, but for those final two years I extrapolated from the 2027 estimates based on the growth rates in the forecast numbers of the last few years before 2027 (specifically, 2025 to 2027).  Other analysts would use similar methods, and for the final two years of a ten-year series the totals will be close.

As we will see below, the Warren figures are mostly, although not entirely, consistent with these NHE forecasts.  The causes of the limited inconsistencies are not fully clear, as the Warren figures are mostly presented in terms of what the shifts would be from some base.  Despite this, it is still useful to review first the NHE numbers, as they will give one a sense of the magnitudes involved in the funding of our health care system as it currently exists.  And they are huge.

The NHE forecasts (extrapolated for the final years, as noted above) for health expenditures between 2020 and 2029 under current law will be:

in $ trillion

GDP share

Total National Health Expenditures under Current Law:  2020-29

$52.5

18.9%

A.  Federal Government

$15.8

5.7%

  Private insurance for government employees

$0.5

0.2%

  Medicare taxes for government employees

$0.1

0.0%

  Medicare from budget

$6.0

2.1%

  Medicaid

$5.5

2.0%

  Other health programs (CHIP, DOD, VA, more)

$3.8

1.4%

B.  State and Local Government

$8.7

3.1%

  Private insurance for government employees

$2.8

1.0%

  Medicare taxes for government employees

$0.2

0.1%

  Medicaid

$3.4

1.2%

  Other health programs

$2.3

0.8%

C.  Private Business

$10.1

3.6%

  Private insurance for employees

$7.7

2.8%

  Other (Medicare, disability, worker comp, more)

$2.4

0.8%

D.  Households

$14.3

5.2%

  Private insurance premia and employee share

$5.1

1.8%

  Medicare taxes

$4.0

1.4%

  Out-of-Pocket

$5.2

1.9%

E.  Other Private Revenue (philanthropy, more)

$3.5

1.3%

Total national health expenditures under current law are forecast to be $52.5 trillion dollars over the period 2020 to 2029.  This is huge.  It comes to an average of 18.9% of GDP over the period as a whole, rising from 17.9% in 2020 to 19.9% in 2029.  By way of comparison, the Congressional Budget Office forecast of total federal government tax and other revenues (including all income taxes, Social Security taxes, and everything else) will be less than this, summing “only” to $45.6 trillion over this period.  Addressing how health care spending is funded will unavoidably deal with huge dollar amounts.

The $52.5 trillion in total health care costs are then funded through a combination of the amounts spent by the federal government ($15.8 trillion), state and local governments ($8.7 trillion), private businesses for their employees ($10.1 trillion), households ($14.3 trillion), and other sources, including philanthropy ($3.5 trillion).  Taking the federal government expenditures as an example, the NHE forecasts are that the federal government will spend $0.5 trillion over the ten years for its payments to private insurers to cover health insurance for federal workers, and $0.1 trillion in Medicare taxes for those federal employees.  These are relatively minor amounts but are included for completeness.  The really major expenditures are then what the federal government will provide directly to Medicare from the budget ($6.0 trillion), will spend on Medicaid ($5.5 trillion), and will spend on other health programs such as for CHIP (the Children’s Health Insurance Program), for the Department of Defense, for the VA, and so on ($3.8 trillion).

The breakdowns in the other components of health care spending are similar, and will not be repeated here.  But it is useful to note that even under current law, the total being spent on health care by government (the federal $15.8 trillion as well as the state and local $8.7 trillion) would be expected to come to $22.5 trillion over the ten years, or 43% of the $52.5 trillion forecast to be spent.  Government is already heavily involved in health care funding in the US, even though the system is often described as “employer-based”.

This mix of health care funding sources would then differ dramatically under any Medicare-for-All proposal, even with total health care expenditures unchanged.  Elizabeth Warren provides specifics on what this would be under her plan (available at both her campaign website and identically also at this commercial website in case her website is eventually closed).  Additional detail is provided in two more technical notes, prepared by advisors to her campaign, first on the overall costs of her Medicare-for-All plan, and second on the taxes and other measures that would be implemented to fund the federal government expenditures in such a program.

The specifics on the costs are presented in the following table:

Warren Medicare-for-All Plan:  2020-29

in $ trillion

GDP share

A.  Base National Health Expenditures

$52.0

18.7%

  Increase in cost from expanded cover

$7.0

2.5%

B.  Total Health Expenditures if nothing else done

$59.0

21.2%

1) National health spending not affected by plan

$8.0

2.9%

2) Base level of Federal Govt Spending before plan

$17.0

6.1%

C.  Increase in Federal Govt Spending Before Savings

$34.0

12.2%

D.  Savings from Reforms

$7.5

2.7%

1) Lower Admin Costs (beyond Urban Inst estimate)

$1.8

0.6%

2) Lower Costs of Prescription Drugs

$1.7

0.6%

3) Lower Costs and Payments to Health Providers

$2.9

1.0%

4) Slower Growth of Medical Costs

$1.1

0.4%

E.  Net Increase in Federal Govt Spending

$26.5

9.5%

As a base from which to start, the Warren team used estimates made by analysts at the Urban Institute of what total national health expenditures would be under current law and then under a Medicare-for-All system (with the expansive cover proposed by Warren as well as by Sanders).  The Urban Institute forecasts that under current law, total national health expenditures would be $52.0 trillion for the period 2020-29.  This is a bit below the $52.5 trillion figure arrived at using the NHE forecasts of the staff at the Centers for Medicare and Medicaid Services (CMS), but close (99%).  The Urban Institute has its own model for forecasting health expenditures, but say that they use the CMS figures for certain components they do not directly model.

The $52 trillion in health expenditures would be under current law.  The more expansive cover under the Warren (and Sanders) plans would then make health care more widely available, and the Urban Institute estimated (in a separate, but linked, publication) that this would lead to a net increase in health care costs of $7 trillion over the 2020-29 period.  This is a net increase as the Urban Institute includes in the $7 trillion certain savings from a Medicare-for-All system, in particular savings from the far lower administrative costs of Medicare compared to the costs at private insurers in the US (savings I discussed in an earlier post on this blog).

Total national health spending would then be $59 trillion over the ten years.  To arrive at what the federal government would be funding out of this, the Urban Institute analysts first subtracted $8 trillion of health care costs that they estimate would not be affected under a switch to a Medicare-for-All funding system.  These include a variety of expenditures, such as medical care for the military and their families when deployed overseas, acute care for people living in institutions (such as prisons as well as nursing homes), certain state and local government direct expenditures, public health programs, and so on.

The Urban Institute then estimates that other federal government health expenditures (under current law) would total $17 trillion over the ten years.  This is higher than the $15.8 trillion forecast in the CMS NHE numbers discussed above, and it is not clear why (particularly as certain of the federal government expenditures, such as for military personnel, are included in the $8 trillion figure of costs that will not be affected).  The Urban Institute reports made publicly available are not technical documents, so many of the details are not explained and documented.  But based on the $17 trillion figure for federal health spending, the increase in federal health expenditures (due to shifts from others under a Medicare-for-All plan), would be $59t – $8t – $17t = $34 trillion.

The Warren advisors started from this $34 trillion figure.  From this, they estimated that savings from several measures that would accompany their plan would lead to $7.5 trillion in lower national health care costs over the period.  One would be further savings from the lower administrative costs of the far more efficient Medicare system.  The Urban Institute estimated that such administrative costs (as a share of total costs of the insurance plan) could, conservatively, be reduced to 6% under Medicare, down from the 12.2% that it costs private insurers to administer their insurance plans (in their high-cost business model, with its negotiated networks and other such costs).  The Warren team argued, reasonably, that this could be reduced further to just 2.3%, which is what it now in fact costs Medicare to administer its system.

The Warren advisors then estimated that other cost savings could be achieved through reforms of the prescription drug system in the US ($1.7 trillion), through lower costs incurred by health care providers when they need only to deal with one insurance provider (Medicare) rather than the complex system of private insurers they must now contend with (and then lower payments to reflect this – an estimated $2.9 trillion in savings), and an overall slower growth of health care costs ($1.1 trillion).

With the estimated $7.5 trillion in savings from such measures, the net increase in federal spending for health care over the ten year period would be $26.5 trillion ( = $34.0t – $7.5t).

This is still a giant number.  Recall that the CBO estimate of all federal government tax and other revenue over this period totals just $45.6 trillion, and $26.5 trillion is 58% of this.  So how would Warren cover this cost?:

Warren Plan:  Paying for the Shift to Federal Govt Spending

in $ trillion

GDP share

Net Increase In Federal Spending

$26.5

9.5%

A.  Taxes / Transfers from Current Health Care Spending:

$14.9

5.4%

1) Transfer from State/Local Govt health insurance savings

$6.1

2.2%

2) Tax Private Businesses amount of insurance savings

$8.8

3.2%

B.  Other New Taxes / Federal Govt Spending Reductions:

$11.7

4.2%

1) Taxes on worker income now spent on health insurance

$1.4

0.5%

2) Financial transactions tax of 0.1%

$0.8

0.3%

3) Systemic risk fee on large financial institutions

$0.1

0.0%

4) End accelerated depreciation for large businesses

$1.25

0.5%

5) Minimum tax on foreign earnings of 35% + tax on foreign firms in US

$1.65

0.6%

6) Additional tax of 3% on wealth over $1 billion

$1.0

0.4%

7) Capital gains (as accrued) taxed at regular rates for richest 1%

$2.0

0.7%

8) Better tax law enforcement

$2.3

0.8%

9) Tax revenues from normalization of immigrants

$0.4

0.1%

10) Reduction in military spending

$0.8

0.3%

C.  Reductions in Health Care Funding

$12.2 4.4%

1) Household savings on health costs (insurance + out-of-pocket)

$12.0

4.3%

2) Net private business savings on health costs

$0.2

0.1%

First, Warren would require that state and local governments transfer to the federal level what those governments are now spending out of their own budgets for private insurance for state employees ($2.8 trillion in the table above of the CMS NHE forecasts) plus what those governments spend out of their budgets for Medicaid ($3.4 trillion in the CMS NHE figures).  The total in the CMS NHE figures of $6.2 trillion is within roundoff of the $6.1 trillion in the Warren estimates.  Whether such a transfer is politically realistic is a separate question.  I can imagine that a number of the state governments (particularly those in Republican hands) would tell the federal authorities that it is great that they are now covering those health care costs directly (under a Medicare-for-All system), but that they will keep the savings in their budgets for themselves.  In any case, it would certainly be litigated in the courts.

Warren would then also set what would in essence (or in actuality) be a tax on private businesses, equal to 98% of what those businesses now spend for the employer share of the health care premia for the private insurance for their workers.  Warren’s team estimates that businesses would spend under current law a total of $9.0 trillion over the ten year period on their share of their employer-based health insurance plans, and 98% of this is $8.8 trillion.  The $9.0 trillion figure appears to be broadly consistent with the CMS NHE figures discussed above, which estimates that private businesses will spend $7.7 trillion over the period on private health insurance for its employees, and also some portion of a further $2.4 trillion in other health expenses the employers will incur.

But the main issue with the new $8.8 trillion tax on private businesses is that it would be set, business by business, to reflect what that business is currently spending for its share (or, more precisely, 98% of its share) of the private health insurance plans for its workers.  Thus firms with health insurance plans that are generous in what they cover and in what share of health care costs they pay (and hence are more expensive), will pay more.  Workers at such firms might be accepting lower wages than they could earn elsewhere, knowing that the generous health insurance plans cover more, including more of what they would otherwise need to pay out-of-pocket.  At the other end, there are firms with stingy plans that are cheap, or even with no health insurance plans at all (which is legal if the firm has fewer than 50 employees, although health insurance plans are still common among such firms).  These firms would pay much less, or even nothing at all, under the Warren proposal, even though their workers, like everyone, would be covered by Medicare-for-All.

Many would view this as inequitable:  Firms with strong health care plans would be penalized, as they would then pay more into the Medicare-for-All funding, while firms with stingy or no health care plans would pay less or even nothing at all.  While there would be some undefined phasing in period in the Warren proposal to more equal shares being charged across firms, this would only be implemented over several years.

Furthermore, knowing that at least for some initial period the firms with the more generous plans would pay more and the firms with the more stingy plans would pay less, would create a perverse set of incentives.  In the mid-November update on her plans (which will be discussed in more detail later in this post), Senator Warren said that she would not introduce legislation for her Medicare-for-All plan until her third year in office.  That would mean that the new Medicare-for-All system would not enter into effect until at least her fourth year in office, and more likely no earlier than two or three years after that (as any such major reform takes time to implement).  If firms expect this to take place at some point in the next several years, they would have a strong incentive to revise the health insurance plans they sponsor for their employees in the direction of making them more stingy, or dropping them altogether if they legally can.

It is therefore likely that at least this aspect of the Warren plan will be revised should it go forward.  An addition to the payroll tax we now pay for Social Security and for Medicare is one likely alternative, and will also give a sense of the magnitudes involved.  Currently workers pay on their wages (half directly and half by their employers on their behalf as part of their overall compensation package) a tax of 12.4% on wages up to $137,700 in 2020 ($132,900 in 2019).  In addition, they pay 2.9% to fund Medicare (with no ceiling), for a total payroll tax of 15.3% on wages up to the ceiling.

The Congressional Budget Office, in their August 2019 forecasts, estimated that the Social Security tax (of 12.4%) will raise $11,269 billion in revenues over 2020-29.  To raise $8.8 trillion on this same wage base, would therefore require a rate of 9.7% (based on the proportions).  The overall payroll tax would then increase from the current 15.3% to a new 25.0%.  Many might view this as too much to pay, but one should recognize that it reflects what is now, on average, being paid on wages once one adds together Social Security, Medicare, and what the average employer pays for its share (or more precisely, 98% of its share) of the private health insurance plans for its employees.  One should also note that while 25% might seem high, it is substantially less than the approximately 40% rate found for payroll taxes (employer and employee combined) in a number of European countries (including Germany, the Netherlands, Belgium, Sweden, and Italy, and with France at over 50%).

Transferring to the federal government what is now being paid out by state and local governments for health insurance ($6.1 trillion, including the state portion for Medicaid), and by 98% of what private businesses are paying ($8.8 trillion), would then leave $11.7 trillion to be raised from other sources (where $11.7t = $26.5t – $6.1t – $8.8t, with rounding).  The Warren plan lists ten specific measures to do this:  six would be new taxes (or increases in existing or proposed taxes); one would be tax revenues from personal incomes that would become taxable with the move to Medicare-for-All; one would be increased revenues from better tax law enforcement; one would be taxes on incomes of immigrants who have had their status normalized; and one would be savings from reduced military spending.  A total of $10.9 trillion would come from higher taxes and $0.8 trillion from military spending reductions.

This is a wide, and diverse, set of funding sources.  I will not comment on each, but note that some analysts consider at least some of the revenue forecasts to be highly optimistic.  And one should always be skeptical when “better tax law enforcement” is assumed to raise a substantial share of the increased revenues needed ($2.3 trillion over ten years in the Warren plan, or 0.8% of GDP, which is huge).

Nevertheless, the Warren plan at least sets out proposals on how revenues might be raised (or expenditures reduced).  She should be commended for this, and it is in sharp contrast to, for example, the Republican / Trump tax cuts approved in December 2017.  Those tax cuts were forecast to lead to a loss in government revenues of $1.5 trillion over ten years (and it now appears that the losses will be even higher).  No effort was made by Trump or by the Republicans in Congress on how those revenue losses would be covered – the revenue losses would instead simply be added to overall government debt.  Warren, in contrast, has laid out specific proposals on how shifting health care expenditures to the federal level would be covered.  While one can be skeptical of certain of the figures, there is at least the recognition that something should be done to cover the shift in health costs.

It is also telling that the measures listed seek to avoid what might be obviously taxes on middle-class incomes.  Presumably this was done for political purposes, but one should recognize that at least some of the measures will impact middle-class incomes.  Specifically, it should be recognized that what employers pay for what is termed “the employer share” of health insurance premia for their employees is, in reality, a portion of the overall compensation package being paid to workers.  Over time, workers’ wages adjust to reflect this.  And while under the Warren plan this employer share (or 98% of it) would be transferred to the government, such a transfer would eventually become a uniform tax on employers (and as discussed above, this should probably be done immediately to avoid the perverse incentives of a gradual shift). The payroll tax would need to increase by 9.7% points to cover this, bringing the total payroll tax (for Social Security, current Medicare, and part of the cost of the new Medicare-for-All program) to 25.0%.  This is a tax on middle-class incomes.  There is nothing necessarily wrong with that, but it should be recognized.

Similarly, the Warren plan recognizes that since what workers now pay as their direct share of the cost of the employer-sponsored health insurance plans will go away under a Medicare-for-All system, the increase in income taxes on such incomes (as they are now largely income tax-exempt) would be substantial ($1.4 trillion over ten years in their estimate).  While fully reasonable, this is still a tax on middle-class incomes.

With total health care spending about the same ($7.0 trillion more for the increased access, offset by $7.5 trillion in cost reductions, for a net reduction of $0.5 trillion), but with $11.7 trillion in funding from new taxes and other measures, which groups will be spending less?  Under this plan, households would no longer pay health insurance premia nor out-of-pocket for most health care expenses.  The Warren campaign put this figure at $11 trillion over the ten-year period, which would then go to zero.  In addition, private businesses would gain the 2% from the requirement that they transfer 98% (not 100%) of what they now pay in health insurance premia, which would be an additional $0.2 trillion.  The total gain then by these two groups would be $11.2 trillion (ignoring, for this calculation, that some portion of the additional taxes would be paid by them).

But this does not add up properly.  After struggling with this for some time, I believe a mistake was made by the Warren advisors (which may have arisen as they were in a rush to get the plan out).  Assuming all the underlying numbers are correct, the $11.7 trillion raised by additional taxes (mainly) plus the $0.5 trillion net reduction in national health care spending under the plan ($7.0 trillion in more comprehensive coverage, minus $7.5 trillion in cost savings), would imply that the total gain by households and private businesses would be $12.2 trillion.  With the private businesses gaining $0.2 trillion (the 2%), this would imply a $12 trillion gain by households, not $11 trillion.  My guess is that instead of adding the net $0.5 trillion reduction in overall health care expenditures to the $11.7 trillion in increased funding (a total of $12.2 trillion), they subtracted it (a total of $11.2 trillion).

This is not fully clear as all the underlying numbers from the Urban Institute used by the Warren advisors have not been made publicly available (at least not from what I have been able to find).  Of relevance here is how they arrived at their figure that health care costs totaling $34 trillion would shift to the federal government under a Medicare-for-All plan such as that of Senator Warren (and Senator Sanders).  Nor did the Warren advisors present all the numbers on what each of the groups (state and local governments, private businesses, and households) would spend under current law and under their Medicare-for-All proposal.  Rather, they only provided how each of these would change.

[Side note:  There is possibly also another issue.  The CMS NHE figures discussed above forecast that total household expenditures over the period for private health insurance premia and for out-of-pocket expenses would total just $10.3 trillion.  On top of this, households would also spend $4.0 trillion in existing Medicare taxes (for old age cover).  While the Warren plan does not address this explicitly, implicit in her numbers is that the taxes gathered for old-age Medicare would remain as they are now (even though Medicare benefits would switch to the more generous cover of the Warren Medicare-for-All plan, such as no deductibles or co-pays).  But if households will be spending $10.3 trillion over the period for health care premia and other expenses, then their savings under the Warren plan cannot be $11 trillion, much less $12 trillion.  What is going on?  It is not fully clear, as the full set of underlying numbers have not been presented, but it is possible that the Warren advisors are working from a forecast that household spending on health care will total $11 trillion, rather than the $10.3 trillion forecast in the CMS NHE figures.  We would need to see the underlying numbers to sort this out.]

With the exception of this possible “glitch”, the Warren plan does, however, provide us with a good sense of the magnitudes of what the shifts in costs would be under a comprehensive Medicare-for-All plan.

In summary, with the US spending so much on health care ($52.0 or $52.5 trillion expected over the ten-year period under current law, or close to 19% of GDP), shifting how those costs are paid from private to public insurance will inevitably imply massive dollar amounts.  This does not mean higher amounts would be spent on health care.  Indeed, with Medicare far more cost-efficient than private insurers, total costs for a given level of coverage will go down.  But the shifts will still be massive.

The Warren plan covers these costs by three steps:  First, while an enhanced level of coverage would be provided (which by itself would increase overall costs by an estimated $7.0 trillion), these would be more than fully offset by measures which would save on costs (by an estimated $7.5 trillion).  Second, what state and local governments are now spending for health care coverage ($6.1 trillion), and 98% of what private businesses are spending as part of the wage packages for their employees ($8.8 trillion), would be transferred to the federal government, as the federal government would now cover these health care costs under the Medicare-for-All plan.  And third, the remaining $11.7 trillion needed to cover the additional federal level expenditures (of $26.5 trillion under the plan) would come from a wide range of measures, mostly of new or increased taxes, but also from a cut in military spending.

The net result would then be that households would no longer pay for health insurance directly, nor for current out-of-pocket costs.  These would be paid for through indirect means, as outlined above.  One can debate the extent to which these new taxes (in particular the transfer from private firms of what they are now paying for their employee health insurance) will impact households, but in the end there will be impacts.  Some households will end up spending less than they are now, and some will spend more.  And given the magnitudes of the underlying health care costs involved, those impacts will be huge.

C.  The Buttigieg Medicare-for-All-Who-Want-It Plan

Pete Buttigieg, as well as several other of the Democratic candidates for president (notably former Vice President Joe Biden and Senator Amy Klobuchar), have proposed instead adding a public option to the Obamacare market exchanges.  Buttigieg calls this Medicare-for-All-Who-Want-It, and has said that if private insurers then do not respond with something dramatically better “this public plan will create a natural glide-path to Medicare for All”.  This option would be a publicly managed (perhaps by Medicare) insurance plan, with similar coverage to what is now offered by private insurers and made available through the Obamacare marketplace exchanges along with the private insurance plans.  Buttigieg’s basic proposal is available at his campaign web site, with more detail provided at this additional post.

To see how this would work, we will first review how prices and other features for the health insurance plans are currently set by private insurers on the Obamacare exchanges, and then how the public option as proposed by Buttigieg would fit into this system.  One can then draw the implications for the system that one would end up with – a system that would be quite different from a Medicare-for-All system such as that proposed by Senator Warren.  And an important question is whether a system with a public option such as that proposed by Buttigieg would in fact create a “natural glide-path” to Medicare-for-All.

The Obamacare marketplace exchanges allow individuals to choose, from among the private plans offered in their particular jurisdiction, a health insurance plan for themselves as an individual or for their family.  The plans offered on the exchanges are not (other than for a few exceptions for small businesses) for the health insurance offered through employers.  Thus they are priced by the insurance companies to reflect what the risk (health expenses) would be, on average, for the individual.  There are some restrictions on how the prices for the individual plans can be set, most notably by not charging different rates for males and females, nor excluding (or charging different rates) those with pre-existing health conditions.  But other than these restrictions, the premia that are charged to individuals vary, and vary widely, based on a number of factors.

Specifically, they can vary by:

a)  The age of the individual (or of the family members in a family plan):  Health care costs are generally higher for older individuals.  While private insurers had lobbied to be able to charge prices for the oldest individuals that would be covered (age 64, as Medicare starts at age 65) of as much as five times the prices for the youngest, the final legislation set the limit at three times.  Still, this is a broad range.

b)  Location:  The price of the insurance plan varies by where the individual lives – not just by state but down to the county level within a state.  Health care costs can differ greatly across the country.  And while this is often attributed to general living costs being higher in some parts of the country than in others, a more important factor is the extent to which effective competition drives down (or not) the costs charged by doctors and hospitals on the one hand, and by the private insurers themselves on the other hand.  As discussed in an earlier post on this blog, much of the health care system in the US is characterized as a bilateral oligopoly in any given locality, where there might be only one or a few hospitals (where those few hospitals may themselves be part of a chain with common ownership), only a few doctors in particular medical specialties, and where there are also may only be a small number (including possibly just one) of health care insurers.

Health care prices charged will be high where such competition is limited, and low relative to elsewhere where such competition is more extensive.  Thus, for example, the premium rate for a 40-year old individual enrolled in the benchmark Obamacare insurance plan in 2020 in Minnesota is an average (across the state) of $309 per month (the lowest in the nation), while the benchmark rate in next-door Iowa is $742 per month (the second-highest in the nation) and $881 in not-so-far-away Wyoming (the highest).  The cost of living does not differ that much across these states.  The extent of competition does.

c)  Tobacco use:  While states can opt out of this (or limit it further), the Affordable Care Act allowed that health insurance plans offered on the marketplace exchanges could charge up to 50% more for those individuals who smoke.  This would partially compensate for the much higher health care costs of smokers.

d)  The extent of health care costs covered:  Finally, the Obamacare exchanges allowed for up to four bands or categories of insurance plans, designated by the labels Bronze, Silver, Gold, and Platinum.  They differed in terms of the share of health care costs that would, on average, be covered under the insurance plan, and the share that would then be covered by the individual (in terms of the premium to be paid for the plan, and through the deductibles, co-pays, co-insurance, and other costs, up to some out-of-pocket maximum).  A Bronze level plan would be expected, on average over all the individuals enrolled in the plan, to cover 60% of medical care costs, a Silver plan would cover 70%, a Gold plan 80%, and a Platinum plan 90%.

But the plans offered within a band (Bronze, Silver, Gold, Platinum) can differ widely in what the mix would be between the deductible, the specific co-pay and co-insurance rates, the out-of-pocket maximum, and then in the premium to be paid.  The plans could also differ in exactly what medical costs they cover (e.g. some cover dental costs, some cover prescription drugs, etc.), which doctors and hospitals were in the network for that plan, and what (if any) costs would be covered if one obtained medical services from an out of network doctor or hospital.

The resulting prices for the plans will therefore differ markedly across individuals in the nation.  To illustrate how wide this variation can be, even within just one state, I looked at the cost of the insurance plans offered in two regions of Florida.  Florida was chosen because its average benchmark plan premium rate ($468 in 2020) is close to the US average ($462), and it is a largish state where up to six insurers compete in offering plans in some parts of the state, while in other parts of the state only one insurer offers plans.  Choosing each just at random, I looked at the plans offered in Wakulla County, in the northern part of the state, which has just one insurer offering plans, and in Hillsborough County, around Tampa in the central part of the state, where five insurers offer plans.  One can find the plans offered, with all the details on their prices and coverage, at the Affordable Care Act web site, HealthCare.gov.

The costs differ dramatically between the two regions, and are systematically higher in Wakulla County.  I priced what a family plan would cost, with a household of four:  a man of 35, a woman of 35, a boy of 12, and a girl of 10 (although sex will not matter).  The cost of the second-lowest cost Silver plan (the benchmark plan, which I will discuss further below) would be $2,451.12 per month ($29,413 per year) in Wakulla, or 80% higher than the benchmark plan rate of $1,358.94 per month ($16,307 per year) in Hillsborough.  But the effective price difference was even greater, as the deductible in the Wakulla benchmark plan is $11,900, versus a deductible of $8,000 in Hillsborough.  And the plans differed in various other ways as well.

At the low end of the price range, the least expensive plan offered in Wakulla (a Bronze level plan) would still cost $1,538.22 per month ($18,459 per year), which is 52% more than the least expensive plan offered in Hillsborough of $1,011.00 per month ($12,132 per year).  Both of these plans had a deductible of $16,300 for the family, and also an out of pocket maximum of $16,300.  That is, these were essentially catastrophic health care plans that would not cover any health care expenses unless very high health care costs ($16,300) were incurred in the year.  Furthermore, one would have to pay $34,759 in Wakulla ($28,432 in Hillsborough) for the monthly premia plus the out of pocket expenses in any year when one’s health care costs exceeded the out of pocket maximum.

These costs are huge but reflect the fact that, as discussed at the top of this post, health care costs are simply very high in the US.  The amounts paid in premia each year (of $29,413 in Wakulla and $16,307 in Hillsborough) span the average paid (in 2019) of $20,576 for a family plan in employer-sponsored coverage discussed at the top of this post.  The main difference is that a large share (71% on average in 2019) of the cost of the employer-sponsored plans is hidden as it is paid by the employer from the overall compensation package for the employees, but before what is then (residually) paid in wages to the workers.  But the cost is still there.

Competition (or lack of it) between insurers also matter.  The far higher costs in Wakulla relative to Hillsborough are not due to a much higher cost of living in that part of the state (indeed, the cost of living there is probably lower), but rather because only one insurer is offering plans in Wakulla versus five in Hillsborough.  But even with the benefit of competition between insurers, it would be difficult for most families to be able to afford, on their own, such health insurance costs.  Hence a key aspect of the Affordable Care Act are federally funded subsidies provided to individuals and households to be able to purchase such health care coverage.  But this also adds an additional layer of complexity.

There are two forms of these subsidies provided for under the Affordable Care Act.  One is a subsidy on the insurance premia paid.  This is set according to the cost of the second-lowest cost Silver level plan in the area where the individual lives (termed the “benchmark plan”), and sets the subsidy to be equal to the difference between the cost of that benchmark plan and some percentage of family income.  That percentage varies by family income, and starts low (2.08% of family income in 2019, for example, for family incomes of up to 133% of the federal poverty line), and rises up to 9.86% (in 2019) for a family income between 300 and 400% of the federal poverty line.  There is no subsidy for those with incomes above 400% of the federal poverty line.  The percentages are adjusted year to year according to a formula that reflects certain relative price changes.  The ceiling rate of 9.86% in 2019, for example, began at 9.5% in 2014, and in fact fell in 2020 to 9.78%.

[Technical Note:  Why the second-lowest price to determine the benchmark plan?  It follows from a basic finding of those who analyze how markets function best.  If you are selling a product, then one wants those who are bidding to buy the product to bid the highest price that they are willing to pay.  But if the price that they will pay in the end depends on the price they specifically offer, they will bias their bid price downwards in the hope that they will get the product at a somewhat lower price.  And since all the bidders follow the same logic, the price will be biased low.  By providing the product to the one who bids the highest, but at the price of the second-highest bidder, one will remove that systematic bias.  In the case here, where one is offering a product for sale (the insurance plan), the same logic holds, but it will be the second-lowest priced plan chosen to serve as the benchmark.  And while the issue here is a price to be used for setting the subsidy that will be provided to those participating in these markets, the same principle holds.]

The second subsidy, provided for those with incomes up to 250% of the federal poverty line, covers a share of the out-of-pocket costs for deductibles, co-pays, and co-insurance.  The insurance companies would initially provide these (i.e. not charge the individual for these when health costs are incurred), and under the Affordable Care Act would then be compensated by the federal government for these costs.  However, the Trump administration working with the then Republican-controlled Congress ended these payments to the insurance companies, by zeroing out the funds for these in the budget.

The insurance companies were, however, still obliged by law to provide these cost-sharing subsidies to the eligible (low income) enrollees in their plans.  The result was that the insurance companies were forced to raise their premium rates on the plans to everyone to cover those costs.

Here it is important to note a feature of how the Obamacare premium subsidies are structured.  Since the amount a person eligible for a premium subsidy (i.e. with income up to 400% of the federal poverty line) will pay is fixed at some percentage of their income, any increase in the cost of the benchmark insurance plan for that individual will be matched dollar for dollar by an increase in the premium subsidy.  Hence the decision by Trump and the Republicans in Congress to end the cost-sharing subsidies led directly to a similar amount of higher premium subsidies being paid, with little or no savings to the budget.

But it gets worse. While those receiving the premium subsidies (those with incomes up to 400% of the federal poverty line) would not be affected by the now higher plan prices, middle-income households with incomes above that 400% line would have to pay the higher prices.  As a result, some of those households dropped their coverage due to the higher cost.  This in turn led the insurance companies to raise the costs of their plans by even more (due to the more limited, and likely higher risk, mix of enrollees in their plans).  This in turn then led to even higher premium subsidies being paid to those eligible (those with incomes below 400% of the poverty line).  The end result of this effort by Trump and the Republicans in Congress to undermine the Obamacare exchanges was to increase the amount spent in the federal budget over what would have been the case had they continued to fund the cost-sharing subsidies.

The Buttigieg plan (and similarly that of others, such as Joe Biden) would then be to keep this basic structure, but add to it a publicly-managed health insurance option.  It would be sold on the Obamacare marketplace exchanges, in parallel with the private plans, and those seeking health care insurance in those markets would be able to choose whichever they preferred.

What would be the impact?  The Congressional Budget Office provided estimates in an analysis undertaken in 2013.  They concluded that a public option would be able to provide health plans similar to the private plans offered on the Obamacare exchanges, but at premium rates that would be 7 to 8% less.  That is, for similar coverage the greater efficiency that could be achieved by a publicly managed option (due to greater scale, the ability to piggy-back on the extremely efficient Medicare system, and by not paying the profit margins that the private health insurers demand), could provide insurance cover at a significantly lower cost.  Note this 7 to 8% lower cost would be an average across the country – it would be more in some areas and less in others.  And with the public option priced at this level, covering its costs, the CBO estimates (conservatively, it would appear) that 35% of those participating in the Obamacare exchanges would choose this public option.

And it gets better.  While there would be no direct effect on the net government budget by offering a public option priced to cover its costs (no more and no less), there would be significant positive indirect effects.  First, government outlays would be reduced, as the new competition brought on to the Obamacare exchanges by the public option would drive down overall prices on the exchanges, and in particular the price of the benchmark insurance plan (the second-lowest cost Silver plan).  At these lower costs, the amount the government would need to spend on premium subsidies for existing enrollees with incomes up to 400% of the federal poverty line would go down.  This would be partially (and only partially) offset, however, by a larger number of those currently with no insurance choosing now to enroll through the exchanges to obtain health care insurance.  A number of these individuals and their families would be eligible for premium subsidies.  However, while this would be a cost to the budget, increased enrollment is a good thing and was, after all, the primary objective of the Affordable Care Act.

Second, with some workers (and their employers) now finding the insurance options on the exchanges more attractive, a switch of some share of workers to the exchanges will lead to an increase in the taxable share of worker incomes.  Hence government revenues would go up.

The impact of these two sets of indirect effects would be significant savings to the government budget.  The CBO estimates were for the period 2014 to 2023, but assumed the program would be in effect only from 2016 to 2023 and with a ramping up period in 2016.  Hence this was not a true ten-year impact estimate.  But if one extrapolates the CBO figures for a full ten years, and for the period 2020 to 2029 (the same period as was used above for the Warren plan), the net savings to the budget would be about $320 billion.  This is not small.

Adding a public option to the Obamacare exchanges would therefore appear to be an obvious thing to do, and it is.  And indeed, a public option was included in the Affordable Care Act legislation as it was originally passed in the House of Representatives in 2009.  But it was then taken out by the Senate.  The Democrats had a majority in the Senate at that time, but still abided by the legislative rules that required a 60 vote majority to pass major pieces of legislation.  (This was later effectively changed by Senate Majority Leader Mitch McConnell when Republicans took control of the Senate so that, for example, the major re-writing of the tax code in December 2017 was deemed to require only 51 votes to pass.)  But to get to 60 votes, the Democrats needed the vote of Senator Joe Lieberman of Connecticut.  Lieberman would only agree if the public option was taken out.  Lieberman represented Connecticut and insurers are especially influential in that state, providing significant campaign contributions and with several headquartered there.  And it is only the private insurers who will lose out by allowing competition from a public option.  As a consequence, the Affordable Care Act as ultimately passed did not include a public option.

Buttigieg’s full health care plan includes a number of other proposals as well.  Generally, all the candidates support them (even Trump says he does on some of them), including requirements such as ending surprise out-of-network billing (when care is provided at an in-network hospital by an out-of-network doctor or other provider, and then billed at often shockingly high out-of-network rates); limits on what those out-of-network rates can be (Buttigieg would set a ceiling of two times the Medicare rates); allowing Medicare to negotiate on prescription drug prices used in health care services it covers (Medicare is currently blocked from doing so by law); and more.  But while all the candidates support such reforms, there are powerful vested interests that have so far succeeded in blocking them.

Buttigieg would also lower the share of family income used to determine the premium subsidies they are eligible for.  As discussed above, that share is 9.78% in 2020 for those with incomes between 300 and 400% of the federal poverty line (and lower for those at lower income levels).  Buttigieg would set the ceiling rate at 8.5% (with lower rates for those at lower incomes), and importantly would also remove the limit on family incomes for eligibility.  This would be significant for many.  Take, as an example, the price of the benchmark plan being offered in 2020 in Wakulla County, Florida, of $29,413 for a family of four (at the ages specified, as discussed above).  With the federal poverty line in 2020 of $26,200 for a family of four, and hence $104,800 as 400% of this poverty line, such a family would be required to pay 9.78% of their income ($10,249) for their share of the cost should they choose the benchmark insurance plan, and would receive a subsidy of $19,164 (where $19,164 = $29,413 – $10,249).  If they earned $1 more than 400% of the poverty line, they would receive no subsidy and would have to pay the full $29,413 should they purchase the benchmark plan.

In the Buttigieg proposal, the share of income would be capped at 8.5%, so for someone at 400% of the poverty line their share of the cost would be $8,908 instead of $10,249.  Furthermore, it would not be restricted only to those with an income below 400% of the poverty line.  So if the benchmark plan cost were to remain at $29,413 (the CBO estimates it would go down by 7 to 8% if a public option is introduced, as noted above, but leave that aside for here), families with incomes of up to $346,035 would be eligible in this county of Florida for at least some subsidy, with the subsidy having diminished smoothly to zero at that point.

Another difference is that Buttgieg proposes that the benchmark plan be shifted from the second-lowest cost Silver plan to a Gold-level plan (presumably also second-lowest cost, although he does not say specifically in what is posted).  Gold-level plans have more generous benefits than the Silver plans, but at the cost of higher premia.  Hence the premium subsidies would be higher for any given level of income given the 8.5% cap.  Keep in mind also that the Affordable Care Act premium subsidies, while determined relative to the cost of the benchmark insurance plan, can then be used by the individual for any other plan offered on the exchanges.  The dollar amount provided under the subsidy will be the same.

Buttigieg would also auto-enroll into the public option (which could then later be switched by the individual to one of the private plans) those who would otherwise be eligible for free insurance.  This would be in cases where they would have been eligible for Medicaid had that state accepted the expansion under the Affordable Care Act but then refused to do so, or in cases where the individual or family would have been eligible for a zero-cost plan after the premium and cost-sharing subsidies are taken into account.  Possibly more problematic would be the Buttigieg proposal to enroll retroactively someone without a health insurance plan who would then need some health care treatment.  This could provide an incentive not to enroll in any insurance plan (with its associated monthly premia) unless and until some substantial health care cost is incurred.

How would this be paid for?  Buttigieg estimates that the 10-year cost would be $1.5 trillion, which is modest compared to the Medicare-for-All plans.  There is no way I can check that figure, but it appears plausible.  Part of the reason it is relatively modest is that for those workers enrolled in an employer-based plan but who choose to switch to the public option (as they would now be allowed to do), Buttigieg would require the employer to pay in an amount equal to what they would otherwise have paid for that employee’s health insurance plan.

While one should want to require something of this nature, exactly how it would work is not clear.  There could be an adverse selection problem.  If the employer was required to pay in an amount that is the pro-rated share of the cost of one worker in the company plan, and hence the same for each worker whether old or young or with a pre-existing condition or not, there would be an incentive to encourage (perhaps quietly) the workers with the more expensive expected health insurance expenses to switch to the public program.  How to set the prices of what the companies would pay to avoid such negative outcomes would need to be worked out.  There is also the issue that the system would create an incentive for companies to scrimp on the coverage of the health plans they offer, so that they would then both encourage workers to shift to the public option and pay less into that system when their workers do so.

But such issues should be resolvable, for example by tying what the employer would pay for an employee switching to the public option not to what the employer was spending before on their health plan, but rather to what providing health care coverage would cost in the public option for that worker.

The addition, then, of the public option would be a major improvement over what we have now.  Would it, however, provide as Buttigieg asserts a “natural glide-path to Medicare for All” if private health insurers “are not able to offer something dramatically better” than what they have now?  That is not so clear.

The addition of the public option to the present system would not fundamentally change the system.  One would continue to have a highly complex and fragmented system, with disparate plans where any individual’s cost of health insurance would depend on several factors.  Specifically, even for the same degree of coverage in terms of what medical costs are covered and for the same deductible, co-pays, and so on, the cost of their health plan would vary depending on the expected health care risks of the individual (their age), how much it then costs to address any consequent health care issues that arise (their location), and their income (for those eligible for subsidies).

Setting aside the income (health care subsidies) issue for the moment, we have noted above that health plan costs can vary by up to a factor of three based on age.  And the costs by location vary similarly.  Even using state-wide averages (the variation will be greater if one took into account the different costs at the county level within a state), the average cost of the benchmark insurance plan for a 40-year-old in 2020 is $881 per month in Wyoming but $309 in Minnesota.  This is a ratio (between the most expensive and the least) of close to three.  Putting just these two cost factors together, the range of costs for an individual across the country can vary by a factor of nine.  Taking within state variation in cost also into account would lead to an even higher ratio.

By what path would this then possibly transition to a Medicare-for-All system?  Suppose one is at the point where 90% or more of the population has chosen to enroll in the public option.  While almost all of the population might then be in a publicly managed health care plan, they would be in plans where either they (or other parties on their behalf, i.e. their employers or the government) are paying premia that could vary by a factor of nine or more for the exact same coverage.  Some (the young and healthy, living in areas where health care costs are more modest) would be paying relatively little, while others (the old and those living in areas where health care costs are especially high) would be paying much more.  This is not what most people envision when referring to Medicare-for-All.

Would this then transition to a true Medicare-for-All system?  That could be difficult.  In a Medicare-for-All system as most people view it, the amount paid for health care would vary only based on income.  The current Medicare system (for those aged 65 and older) is funded by a combination of taxes on wages (2.9% of wages of workers of all ages, technically half by the employer and half by the employee), and by monthly premia for those enrolled in Medicare (where these premia start at $144.60 monthly in 2020 per person, and rise to as much as $491.60 per person for those at high-income levels).

If the Medicare-for-All system were then funded, directly or indirectly, by taxes and/or premia that are based solely on income (such as a higher payroll tax, for example), the transition would imply that those who were before paying relatively modest amounts in premia for their health care plans (whether via the public option or in one of the private plans) would end up paying more.  And it could be much more given the factor of nine (or greater) range in the cost of these plans.  One should expect that they will scream loudly, and seek to block such a transition.

This would then not be a “natural glide path” to Medicare-for-All.  Rather, unless something major is done, and forced through despite the likely opposition of those who would end up paying more for their health care insurance, the system would likely remain as now, with a highly fragmented and complex system of multiple health care plans, at widely varying premium rates, with some paying relatively modest amounts and some an order of magnitude more.

[And a point of full disclosure:  I had myself, in an earlier post on this blog, not seen this issue.  I had argued that a system with an efficient public option could lead, through competition, to a Medicare-for-All system.  The proposal I had discussed there included that the publicly-managed option would be allowed also to compete on the market for employer-sponsored plans, and not just in the market for individual cover, but the issue would remain.  One would end up in a system with widely varying premia rates, based on the risk of those being covered, and it would then be difficult to move out of such a system to one where what is paid is linked solely to income.]

D.  The Warren Plan for a Public Option as a Transition to Her Medicare-for-All Plan

Senator Warren announced her Medicare-for-All plan (described in section B above) on November 1, 2019.  Two weeks later, on November 15, she announced that as first step she would seek to add a public option early in her administration, while postponing to the third year of her prospective administration seeking approval in Congress for her Medicare-for-All plan.  See the link here for this proposal at her campaign website, or here for the same proposal at an external website.

While there are a number of health care reforms she presents in this proposal, several of which she says could be implemented by executive order alone and not require congressional legislation, I will focus here on how she envisions her public option.  It is quite different from the public option as discussed by Buttigieg, Biden, and others, and indeed Warren labels it (somewhat confusingly) a “Medicare for All option”.  It would be offered on the Obamacare market exchanges, along with the private insurance plans that are there now, but would differ from them in key ways.

Most importantly, Warren’s public option would provide for a far more generous level of coverage than what is covered under the private health insurance plans, with this paid for in part by substantially more generous government subsidies than what would be provided to those who enroll in any of the private health insurance plans.  That is, this would no longer be a level playing field, with the public option priced to cover its costs and then competing on the basis of being able to operate more efficiently and at a lower cost than the private plans.

This then addresses the key question, discussed above, of how to transition from a system of multiple, competing, health plan options, to a single-payer Medicare-for-All system.  The answer is that the public option that Warren proposes to add in the first year of her administration would be so generous, and at such a low cost to the individual, that it would make little sense for almost anyone not to enroll in it.

Specifically, under her proposals:

a)  The Warren public option health insurance plan would be comprehensive in what it covers, matching what would be covered in Warren’s November 1 Medicare-for-All proposal.  That is, in addition to what the insurance options on the Obamacare exchanges are now required to include, her public option would include coverage for expenses such as for dental care, vision services, auditory, mental care, long term care, and more.  This would be far broader than what the current Medicare system covers for those over age 65 (but as part of her proposal, she would have Medicare expand its coverage to include these additional medical expenses as well).

b)  There would be a zero deductible from the start, and some unspecified (but low) cap on out-of-pocket expenses.

c)  The Warren public option would be free for those below the age of 18, and free as well for households with incomes below 200% of the federal poverty line (i.e. $52,400 for a family of four in 2020).  Note that in effect this makes Medicaid redundant, as all those now eligible for Medicaid (those with incomes up to 130% of the federal poverty line, but less in states that did not accept the expansion of Medicaid provided for in the Affordable Care Act) would be better off with the proposed Warren public option.

d)  The Warren public option plan premiums, co-pays, and co-insurance would then be set so that the plan would initially cover 90% of expected medical costs.  Note that while a Platinum level plan on the Obamacare exchanges also covers 90%, the public option plan proposed by Warren would cover a broader range of medical expenses (dental, etc.), so they are not fully comparable.

e)  Premium subsidies for the Warren public option (and usable only for this option) would be set so that households do not spend more than 5.0% of their incomes for the insurance plans (and less for those at lower incomes).  This would be well below the 9.86% ceiling in effect in 2019 on premium subsidies (9.78% in 2020) under the current Affordable Care Act system for those purchasing coverage on the exchanges.  Importantly, and as Buttigieg also proposes, these subsidies would be available for households of any income, and not capped at a household income of 400% of the federal poverty line.

The new subsidies would be generous compared to what is now provided.  While it is not clear how much it would cost on average for the comprehensive coverage (with zero deductible) as envisioned in the Warren public option (no estimate was provided in what was posted by the Warren campaign) if one assumes a modest plan cost of $25,000 per year for this expansive cover, the subsidies would be:

Family Income

5% of Income

Subsidy

$100,000

$5,000

$20,000

$300,000

$15,000

$10,000

$500,000

$25,000

$0

The subsidy would only fully phase out at an income of $500,000 in this example.  This would mean that even some households with an income in the top 1% in the US (incomes that started at about $475,000 in 2019) would be receiving subsidies to purchase their health insurance plan.

f)  Keep in mind as well that, as was discussed earlier, any increase in the cost of providing the insurance plan will be covered dollar-for-dollar with an increased subsidy (for those receiving any subsidy).  The amount the individual pays is capped at 5% of income.  This is important as Warren would have the 90% share of expected medical costs being covered by the insurance plan rising “in subsequent years” to 100%.  While this more generous cover would, in normal insurance, need to be paid for by higher premia, the 5% of incomes cap on what will be charged in effect means that the more generous cover would be paid for by higher government subsidies, dollar for dollar, for all those eligible to receive such subsidies.

g)  For those who choose to continue to enroll in one of the private insurance plans offered on the Obamacare exchanges, Warren has that the share of income required from the individual would be “lowered” from the 9.86% rate of 2019 (9.78% in 2020).  But she does not specify to what rate it would be lowered to.  Presumably if the intention is to lower it to the 5.0% rate that would apply for Warren’s public option, they would have said so.  And the subsidy would also be made more generous by benchmarking it to the cost of Gold level plans, rather than the second-lowest cost Silver plan.  Finally, the Warren plan says that for those choosing still to enroll in one of the private insurance plans they would also “lift the upper income limit on eligibility” for the premium subsidies from the current 400% of the federal poverty line.  But it is not clear if it would be removed altogether, or simply lifted to some higher level.

These measures would lead to an increased level of subsidies for those choosing to remain with one of the private plans on the Obamacare exchanges.  But while there is much that is not fully clear here, it does appear clear that the subsidies would not rise to what would be provided to those who choose instead to enroll in the Warren public option.  And what would certainly be the case is that the public option as proposed by Warren would provide a more comprehensive level of health cost cover than what is being covered in the private plans, and with a zero deductible, lower co-pay and co-insurance rates, and a lower out-of-pocket ceiling.

h)  Workers in firms that provide company-sponsored health insurance plans could opt to enroll in the Warren public option instead.  For those who do, their companies would be required to “pay an appropriate fee” to the government.  How that “appropriate fee” would be set was not specified.  If linked to what the employer would be otherwise paying for the company-sponsored plan for the worker, one would have the same adverse selection issue that was discussed above for the similar proposal in the Buttigieg plan.  But it should be possible to address this in some way.

How much would this cost, and how would it be paid for?  As noted above, no specific cost estimates (on neither the cost of a typical plan nor the cost of the overall proposal) are provided in what the Warren campaign posted.  All that is clear is that with the more comprehensive list of what is covered, along with the zero deductible, modest co-pays and co-insurance, and a low limit on out-of-pocket expenses, the Warren public option plans will cost more to provide than what the Platinum level plans offered on the exchanges cost.  This is true even though both would be priced to cover 90% of expected medical costs, since the list of medical costs covered would be broader.

But while the cost of providing the Warren public option plan would be higher, the cost to the individuals signing on to it would be lower due to the greater premium and other subsidies that would be made available for it (with the 5.0% limit on family income, with no ceiling on income for eligibility).  With such subsidies being made available, it is difficult to see why anyone would not wish to sign on to such a plan.  While technically voluntary, and with private insurance “allowed” to compete for such business, this would be far from a level playing field.

Thus there would be a significant cost to the overall government budget to cover the cost of the subsidies provided to those signing on to the Warren public option.  But as noted, no estimate was provided in what was posted by the Warren campaign of what this might be.  All that was provided was the statement that the cost would be less than what her full Medicare-for-All plan (as discussed in Section B above) would cost.  She notes that that proposal had listed a number of taxes and other measures to pay for the Medicare-for-All plan, and that the more modest cost of her proposed public option could make use of some subset of these.

But how much less would that cost be?  It would of course depend on how many people enroll, and that is not known.  But with the higher subsidies provided for a far more extensive cover than available in the private plans offered on the Obamacare exchanges, and indeed more extensive than in most employer-sponsored private health insurance plans, there are not many who would not be personally better off by switching to the Warren public option.

There would, however, be at least one key difference in the funding, at least to start.  While Warren has that individuals with incomes over 250% of the federal poverty line would pay premia for the public option she is proposing, with this capped at no more than 5.0% of family income, the full Warren Medicare-for-All plan would have no such premia.  But paying premia of 5% of income would generate significant funding.  While Warren says that the 5% rate would be scaled down over time (at some unspecified pace), a crude back-of-the-envelope calculation indicates that a 5% charge (if applied throughout the 2020-29 period) could provide on the order of about 40%, and possibly more, of the $11.7 trillion in extra funding (for the 2020-29 period) that would be required in Warren’s Medicare-for-All plan

Specifically, the share of family income to be paid for premia (whether 5.0%, or the 9.86% in 2019 on the current Obamacare exchanges) is based on a share of taxable household income.  With some minor adjustments (which can be ignored for the purposes here), that income is the adjusted gross income shown on the family’s income tax return.  Using data for 2016 reported by the IRS, the total adjusted gross income shown on all tax returns filed in the US that year was $10,226 billion.  Of this, $1,960 billion was reported by households with incomes of less than $50,000 (which also accounted for 59.4% of all returns filed).  Since this is roughly what 250% of the poverty line would be (for a family of four), where Warren would not charge any premium rate, those incomes will be excluded.  And while the premium rate would then only be phased up with incomes to the full 5.0% rate, Warren does not say what the pace of that would be.  Taking the extreme case by assuming it would go immediately to the 5.0%, the total adjusted gross income on tax returns filed for 2016 for incomes of $50,000 or more would then be $8,266 billion (= $10,226b – $1,960b).

To make this comparable to the figures discussed in Section B above on the cost of Warren’s full Medicare-for-All plan, one can then take this as a share of GDP and apply it to the forecast value of GDP for the 2020-29 period.  Note first that the figure for overall adjusted gross income as reported on tax returns ($10,226 billion in 2016) is less than GDP (which was $18,715 billion in 2016) for a number of reasons.  Taxable income, as defined under tax law, differs from income as defined in the GDP accounts, and there are other factors as well (such as corporate income).  But the two will generally move together.  Applying then the share of GDP in 2016 accounted for by households with incomes of more than $50,000, to the forecast total GDP for the 2020-29 period ($261,911 billion) and then taking 5.0% of that, households would pay (assuming 100% enroll) about $5.8 trillion if applied to the full ten year period.  This would be a substantial portion of the $11.7 trillion that would need to be raised by new taxes or government spending reductions in the Warren Medicare-for-All plan.  That is, very roughly, half.

This assumes, however, that the premia paid will always be 5.0% of incomes.  But that will not be the case.  The premia will be set at some rate, and households would pay only up to whatever that rate is (but no more than 5.0% of their incomes).  As noted above, even with a premium rate of $25,000 a year (likely low for an average rate, given the generosity of what would be covered), households with incomes of up to $500,000 a year would be receiving subsidies.  And $500,000 a year for household income is approximately the break-point between the 99% and the 1% in terms of income ranking.  If one assumes that the 1% choose not to enroll in the Warren public option, but rather buy their health insurance directly from some private provider, the impact on health care costs incurred in the public plans would be negligible.  They are only 1% of the total (assuming the other 99% do enroll), plus they probably have lower per person health care costs than for those of lower incomes (the rich are generally healthier, with a lower incidence of heart disease, cancer, diabetes, and so on).

But the richest 1% do account for a significant share of overall household income.  Again using the IRS data for 2016, the richest 1% of households accounted for 17.2% of overall adjusted gross income of all households.  Taking this as a share of GDP, applying that share to the forecast 2020-29 GDP, taking 5% of it and subtracting that amount from what would be generated if all households paid the 5%, one arrives at a figure of $4.6 trillion for the funding that could be raised.  This would be close to 40% of the $11.7 trillion required.

These estimates are rough, and would apply only to the initial years of the program Warren is recommending as part of a transition to her Medicare-for-All plan.  But it suggests that 40% or more of the extra government funding required could be raised by charging a 5% premium to those with incomes over 250% of the poverty line.  Note that the $11.7 trillion in net funding needed (over ten years) already has taken into account a transfer from state and local governments of what they would otherwise be spending on Medicaid and other health insurance programs that would become redundant under Warren’s plans.  It is also net of transfers from private companies of what they would otherwise be spending on the employer shares of company-sponsored health insurance plans.  Thus the 5% premium would be a substitute for some share of the additional taxes that Warren has proposed in her Medicare-for-All plan.  But as that 5% premium rate is reduced to zero over time under her proposals, that full set of additional taxes would be needed.  Just not right away.

Still, the amounts involved are huge.  If everyone (other than the extremely rich) choose to enroll in Warren’s public option, as it would make sense for them to do, the 5% premia paid would come to 1.7% of GDP.  The $11.7 trillion required in the full Medicare-for-All plan comes to 4.2% of the ten-year GDP.  Thus there would be a need to raise from some set of sources an additional 2.5% (= 4.2% – 1.7%) of GDP.  GDP in 2020 will total about $22 trillion, and 2.5% of this is $550 billion.  That is a massive amount to be raised.  Keep in mind that this is not additional spending, but rather in effect a transfer from what would otherwise be spent on health care (through the insurance premia we now pay, plus out-of-pocket expenses).  Indeed, there would be a net saving by moving to a more efficient / lower-cost health care funding system.  But that $550 billion would still need to be raised.

E.  Summary, and a Path Forward

The health care funding system in the US certainly needs to change.  The US spends far more than any other country in the world on health care, but despite this health care outcomes are worse than elsewhere.

Fundamental reform is needed, and a number of proposals have been made.  The most far reaching would be to move to a Medicare-for-All system.  Senator Elizabeth Warren has made a detailed proposal on how this would work and what the funding needs would be, and is to be commended for this.  But the funding needs would be massive.  While overall spending on medical care would not go up (indeed it would go down under her plan), there would be massive shifts from how the payments are made now (via premia paid for private health insurance and out-of-pocket) to how they would be made in a single-payer Medicare-for-All scheme.

In Warren’s plan, the shift in spending through government accounts would total an estimated $34.0 trillion over the ten years of 2020-29 (12.2% of GDP), if nothing else is done.  However, Warren’s team estimates that there would be savings of $7.5 trillion from a number of reforms and other efficiency gains leaving $26.5 trillion (9.5% of GDP) to be funded.  To provide a sense of how large this is, it can be compared to the forecast by the CBO that individual income taxes over this period would in total raise less, at only $23.2 trillion.

Part of the $26.5 trillion would be covered by transfers from state and local governments of what they currently spend on health care programs out of their own budgets (primarily Medicaid), and part from transfers of 98% of what private companies spend on the employer share of company-sponsored health care plans for their employees.  But even assuming such transfers will be possible (it is likely they will be strongly resisted), there will still be a need to raise a further $11.7 trillion (4.2% of GDP).  Warren proposes to do this through a series of measures, mostly from new taxes.  In terms of 2020 GDP of about $22 trillion, that 4.2% would come to $920 billion.  This is huge.

Given such amounts to be raised, plus concerns over the possible disruption that any such plan might cause (where one especially never wants to face disruption when health is at stake), many prefer a more gradual and possibly more modest reform.  An obvious alternative would be to include in the Obamacare market exchanges a public option, similar to Medicare and possibly managed by Medicare itself.  Allowing also employees currently on a company-sponsored health insurance plan to opt in to the public option should they wish (with their company still paying a fee tied to what they otherwise would be spending for the worker), one would have that those who want a Medicare-like plan could choose it, and those who don’t don’t.

The Congressional Budget Office has estimated that such a public option could be provided at a cost that is, on average, 7 to 8% less than what private plans charge, as the public option would be more efficient.  On top of this, there would be significant indirect savings to the overall government budget.

But would this then provide “a natural glide-path” to a Medicare-for-All system, as Buttigieg asserts?  That is not so clear.  The reason is that the public option would price plans similar to how the private plans are now priced (just 7 to 8% lower on average).  Their prices would reflect the risks of the individuals being covered and the cost of providing health care where they live.  Thus even if the public option grew to dominate the market, one would still have a wide range of health care premia being paid, which could easily vary by an order of magnitude between the low risk / low cost individuals to the high risk / high cost ones.  And the system would then remain like this, complex and with a wide range of costs linked to factors other than income.  Moving that system to one where the costs depend only on income would lead to higher costs for the low risk / low cost individuals in the system, and they will likely complain loudly.

How was this addressed in the second plan that Warren put out, where (in addition to a long list of other reforms) a public option would be made available immediately, as a transition step to her full Medicare-for-All scheme?  The answer is that the “public option” Warren proposed was quite different from the public option referred to by Buttigieg (as well as by Biden, Klobuchar, and others).  The public option as normally presented has been an option that competes with the private plans on the Obamacare exchanges, priced to cover its costs and receiving no special advantages.

Warren’s public option is different.  It would be comprehensive in terms of what it covered, would not have a deductible, only low co-pay and co-insurance rates, and a low out-of-pocket ceiling.  And while the premium for such a plan would need to be relatively high to cover such benefits and low out-of-pocket costs, Warren would provide government subsidies so that no one would need to pay more than 5% of their incomes to cover those costs.  And at a 5% ceiling, those subsidies could go to some pretty rich people.  Assuming a premium of $25,000 a year would be required to cover the costs of the plans (a conservative estimate, given what it would cover), households with incomes of up to $500,000 a year would be eligible.  That is, all but the richest 1% would be eligible.

In such a system one could choose to continue with a private plan, but for most it would be foolish not to switch.  Thus while this public option as proposed by Warren would be competing with the private plans, it would not be on a level playing field.  Rather, those enrolling in the public option of Warren would receive subsidies substantially greater than what those enrolling in a private plan could.  There is nothing necessarily wrong with this, but it should be recognized.  And those subsidies would have to be funded from somewhere.

The Warren team provided no estimate of what the overall cost of this might be, but simply noted that it would be something less than the full Medicare-for-All plan she had earlier proposed.  And the premium of up to 5% of family income that would be paid to cover a portion of the cost would be a significant source of funds.  But even including this, and assuming most Americans (other than the rich in the top 1%) chose to enroll in Warren’s public option, there would be a need to find $550 billion in additional government funding (if this applied in 2020).

These amounts are all huge.  But given the amount the US is now spending on health care (about $4 trillion expected in 2020, or 18% of GDP), any fundamental shift in how health care is funded will involve massive amounts.  And again it should be emphasized that the amounts needed do not imply a net increase in what will be spent, as the reforms being considered can be expected to reduce overall health care costs.  Nevertheless, the amounts are large, and will lead to major interpersonal shifts (with some paying less than they are now, and some paying more and possibly much more).  Those impacts should not be downplayed.

Still, the Warren plan for a transition to a Medicare-for-All system would be a plan for how to move forward.  It may well not be possible to do this quickly, given the size of the shifts in funding sources.  But one can envision where one might start with a public option such as Warren has proposed (exhaustive in what it covers, and with a zero deductible), but where the ceiling on family income for the premia might start not at 5% but perhaps more like the 8.5% Buttiegieg has proposed.  Then this would be reduced over time, perhaps by 1% point per year while other funding sources are scaled up, with this eventually brought down to zero.  At that point we would be in a full Medicare-for-All system.

The Performance of the Stock Market During Trump’s Term in Office: Not So Special

A.  Introduction

Stock market performance is often taken to be a good measure of how the economy as a whole is performing.  But it is not.  For most Americans it is simply irrelevant, as the overwhelming share of investments in the stock markets are held by only a small segment of the population (the wealthy).  And its track record as a broader indicator of how the economy is performing is imperfect at best.

Still, many do focus on stock market returns, and Trump brags that the performance of the market during his term in office has been spectacular.

That is not the case.  This post will look at how the stock market has performed during Trump’s term in office thus far, and compare it to what that performance was under presidents going back to Reagan up to the same point in their terms.

First, however, we will briefly discuss to what extent one should expect stock market prices to reflect actions a president might be taking.  And the answer is some, but there is much more going on.

B.  Presidential Policies and the Stock Market

Owning shares of a firm entitles the owner to a share of the profits generated by that firm, both now and into the future.  And while there are many complications, a simple metric commonly used to assess the price of a share in a firm, is the price/earnings ratio.  If earnings (profits) go up, now and into the future, then for a given price/earnings ratio the price of the stock would go up in proportion.

Economic policies affect profits.  And in a thriving economy, profits will also be rising.  The policies of a presidential administration will affect this, and although the link is far from a tight one (with important lags as well), policies that are good for the economy as a whole will generally also lead to a rising stock market.

But there is also a more specific link to policy.  What accrues to the shareholders are not overall profits, but profits after taxes.  And this changed significantly as a result of the new tax law pushed through Congress by Trump and the Republicans in December 2017.  It resulted in the effective corporate profits (income) tax being cut by more than half:

This chart is an update of one prepared for an earlier post on this blog (where one can see a further discussion of what lies behind it).  It shows corporate profit taxes at the federal level as a share of corporate profits (calculated from figures in the national income accounts issued by the BEA).  While Trump and the Republicans in Congress asserted the 2017 tax bill would not lead to lower corporate profit taxes being paid (as loopholes would be closed, they asserted), in fact they did.  And dramatically so, with the effective corporate tax rate being slashed by more than half –  from around 15 to 16% prior to 2017, to just 7% or so since the beginning of 2018 (and to just 6.3% most recently).

This cut therefore led to a significant increase in after-tax profits for any given level of before-tax profits, which has accrued to the shareholders.  Note that this would not be due to the corporations becoming more productive or efficient, but rather simply from taxing profits less and shifting the tax burden then on to others (i.e. a redistributive effect).  And based on a reduction in the taxes from 16% of corporate profits to 7%, after-tax profits would have gone from 84% of profits to 93%, an increase of about 11%.  For any given price/earnings ratio, one would then expect stock prices, for this reason alone, to have gone up by about 11%.

[Side note:  Technically one should include in this calculation also the impact of taxes on profits by other government entities – primarily those of state and local governments.  These have been flat at around 3 1/2% of profits, on average.  With these taxes included, after-tax profits rose from 80 1/2% of before-tax profits to 89 1/2%, an increase that is still 11% within round-off.]

One should therefore expect that stock prices following this tax cut (or in anticipation of it) would have been bumped up by an additional 11% above what they otherwise would have been.  Other things equal, the performance of the stock market under Trump should have looked especially good as a result of the shift in taxes away from corporations onto others.  But what has in fact happened?

C.  Trump vs. Obama

The chart at the top of this post compares the performance of the stock market during Trump’s term in office thus far (through December 31, 2019) to that under Obama to the same point in his first term in office.  The difference is clear.  Other than during Obama’s first few months in office, when he inherited from George W. Bush an economy in freefall, stock market performance under Obama was always better than it has been under Trump.  Even after slashing corporate profit taxes by more than half, the stock market under Trump did not do exceptionally well.

The S&P500 Index is being used as the measure of the US stock market.  Most professionals use this index as the best indicator of overall stock market performance, as it is comprehensive and broad (covering the 500 largest US companies as measured by stock market value, with the companies weighted in the index based on their market valuations).  The data were downloaded from Yahoo Finance, where it is conveniently available (with daily values for the index going back to 1927), but can be obtained from a number of sources.  The chart shows end-of-month figures, starting from December 31 of the month before inauguration, and going through to December 31 of their third year in office.  The index is scaled to 100.0 on exactly January 20 (with this presented as “month” 0.65).

So if one wants to claim “bragging rights” for which president saw a better stock market performance, Obama wins over Trump, at least so far in their respective terms.

D.  Trump vs. All Presidents Since Reagan

A comparison to just one president is limited.  How does the performance under Trump compare to that under other US presidents up to the same points in their terms in office?  Trump is roughly in the middle:

This chart tracks the performance under each president since Reagan up through the third year of their first terms in office.  I have adjusted here for inflation (using the CPI), as inflation was substantially higher during the Reagan and Bush Sr. terms in office than it has been since.  (I left the chart at the top of this post of just Obama vs. Trump in nominal terms as inflation in recent years has been steady and low.  But for those interested in the impact of this, one can see the Obama and Trump numbers in real terms in the current chart.)  I have included in this chart only the first terms of each president (with one exception) as the chart is already cluttered and was even more so when I had all the presidential terms.

The exception is that I included for perspective the stock market performance during Clinton’s second term in office.  The stock market rose over that period by close to 80% in real terms, which was substantially higher than under any other president since at least before Reagan in either their first or second terms.  The performance in Obama’s first term (of 146% in real terms) was the second-highest.  There was then a set of cases which, at the three-year mark, showed surprising uniformity in performance, with increases of between 32% and 34% in the second Reagan term, the first Clinton term, the second Obama term, and Trump’s term so far.  Bush Sr. was not far behind this set with an increase of 28%.

The worst performances were under Bush Jr. ( a fall of 22% to the third-year point in his first term), and Reagan (an increase of just 8% to that point in his first term).

So the performance of the market under Trump is in the middle – not the worst, but well below the best.

E.  Single Year Increases in the S&P500 from 1946 to 2019

Finally, was the increase under Trump in his best single year so far (2019) a record?  No, it was not.  Looking at the single year performances (in real terms) since 1946, the top 15 were:

The increase in 2019, of 25.9%, was good, but only the sixth-highest of the 74 years between 1946 and 2019 (inclusive).  The stock market rose by more in 2013 during Obama’s term in office (by 27.7%), and in 1997 (28.8%) and 1995 (30.8%) which were both Clinton years.  And the highest increases were in 1958 (35.7%) and 1954 (45.6%) when Eisenhower was president.

The market also rose substantially in 2017, in Trump’s first year in office, by 16.9%.  But it then fell by 8.0% in 2018, in Trump’s second year in office.  Overall, the average rank (out of the 74 years from 1946 to 2019) of the individual year performances over the three years Trump has been in office so far, would place Trump in the middle third.  Not the worst, but also far from the best.  And comparing the three-year average while Trump has been president to rolling three-year averages since 1946, Trump’s average (of 11.6%) is well below the best.  The highest was an average return of 25.3% in 1995-97 during Clinton’s term in office.  And the three-year average return was also higher at 16.7% in 2012-14 during Obama’s term.

F.  Summary and Conclusion

Trump likes to brag that the performance of the stock market during his term in office has been exceptional.  But despite a slashing of corporate profit taxes (which, other things being equal would be expected to increase stock prices by 11%), the performance of the market during Trump’s term in office would put him in the middle.  Specifically:

a)  The market rose by more during the first three years of Obama’s term in office than it has under Trump;

b)  Compared to the first three years in office of all presidents since Reagan (whether first terms only, or first and second terms) would place Trump in the middle.  Indeed, the increase under Trump so far was almost exactly the same as the increases seen (at the three-year point) in Obama’s second term, in Reagan’s second term, and in Clinton’s first term.  And the return under Trump was well below that seen in Obama’s first term, and especially far below that in Clinton’s second term.

c)  The individual year performances during Trump’s three years have also not been exceptional.  While the performance in 2019 was good, it was below that of a number of other years since World War II, and below that of individual years during Obama’s and Clinton’s terms in office.

But as noted at the start of this post, stock market returns should not be over-emphasized.  An increase in the stock market does little for those who do not have the wealth to have substantial holdings in the stock market, and as a broader indicator of how the overall economy is performing, stock market returns are imperfect at best.

Still, one should be accurate in one’s claims.  And as on many things, Trump has not been.

Andrew Yang’s Proposed $1,000 per Month Grant: Issues Raised in the Democratic Debate

A.  Introduction

This is the second in a series of posts on this blog addressing issues that have come up during the campaign of the candidates for the Democratic nomination for president, and which specifically came up in the October 15 Democratic debate.  As flagged in the previous blog post, one can find a transcript of the debate at the Washington Post website, and a video of the debate at the CNN website.

This post will address Andrew Yang’s proposal of a $1,000 per month grant for every adult American (which I will mostly refer to here as a $12,000 grant per year).  This policy is called a universal basic income (or UBI), and has been explored in a few other countries as well.  It has received increased attention in recent years, in part due to the sharp growth in income inequality in the US of recent decades, that began around 1980.  If properly designed, such a $12,000 grant per adult per year could mark a substantial redistribution of income.  But the degree of redistribution depends directly on how the funding would be raised.  As we will discuss below, Yang’s specific proposals for that are problematic.  There are also other issues with such a program which, even if well designed, calls into question whether it would be the best approach to addressing inequality.  All this will be discussed below.

First, however, it is useful to address two misconceptions that appear to be widespread.  One is that many appear to believe that the $12,000 per adult per year would not need to come from somewhere.  That is, everyone would receive it, but no one would have to provide the funds to pay for it.  That is not possible.  The economy produces so much, whatever is produced accrues as incomes to someone, and if one is to transfer some amount ($12,000 here) to each adult then the amounts so transferred will need to come from somewhere.  That is, this is a redistribution.  There is nothing wrong with a redistribution, if well designed, but it is not a magical creation of something out of nothing.

The other misconception, and asserted by Yang as the primary rationale for such a $12,000 per year grant, is that a “Fourth Industrial Revolution” is now underway which will lead to widespread structural unemployment due to automation.  This issue was addressed in the previous post on this blog, where I noted that the forecast job losses due to automation in the coming years are not out of line with what has been the norm in the US for at least the last 150 years.  There has always been job disruption and turnover, and while assistance should certainly be provided to workers whose jobs will be affected, what is expected in the years going forward is similar to what we have had in the past.

It is also a good thing that workers should not be expected to rely on a $12,000 per year grant to make up for a lost job.  Median earnings of a full-time worker was an estimated $50,653 in 2018, according to the Census Bureau.  A grant of $12,000 would not go far in making up for this.

So the issue is one of redistribution, and to be fair to Yang, I should note that he posts on his campaign website a fair amount of detail on how the program would be paid for.  I make use of that information below.  But the numbers do not really add up, and for a candidate who champions math (something I admire), this is disappointing.

B.  Yang’s Proposal of a $1,000 Monthly Grant to All Americans

First of all, the overall cost.  This is easy to calculate, although not much discussed.  The $12,000 per year grant would go to every adult American, who Yang defines as all those over the age of 18.  There were very close to 250 million Americans over the age of 18 in 2018, so at $12,000 per adult the cost would be $3.0 trillion.

This is far from a small amount.  With GDP of approximately $20 trillion in 2018 ($20.58 trillion to be more precise), such a program would come to 15% of GDP.  That is huge.  Total taxes and revenues received by the federal government (including all income taxes, all taxes for Social Security and Medicare, and everything else) only came to $3.3 trillion in FY2018.  This is only 10% more than the $3.0 trillion that would have been required for Yang’s $12,000 per adult grants.  Or put another way, taxes and other government revenues would need almost to be doubled (raised by 91%) to cover the cost of the program.  As another comparison, the cost of the tax cuts that Trump and the Republican leadership rushed through Congress in December 2017 was forecast to be an estimated $150 billion per year.  That was a big revenue loss.  But the Yang proposal would cost 20 times as much.

With such amounts to be raised, Yang proposes on his campaign website a number of taxes and other measures to fund the program.  One is a value-added tax (VAT), and from his very brief statements during the debates but also in interviews with the media, one gets the impression that all of the program would be funded by a value-added tax.  But that is not the case.  He in fact says on his campaign website that the VAT, at the rate and coverage he would set, would raise only about $800 billion.  This would come only to a bit over a quarter (27%) of the $3.0 trillion needed.  There is a need for much more besides, and to his credit, he presents plans for most (although not all) of this.

So what does he propose specifically?:

a) A New Value-Added Tax:

First, and as much noted, he is proposing that the US institute a VAT at a rate of 10%.  He estimates it would raise approximately $800 billion a year, and for the parameters for the tax that he sets, that is a reasonable estimate.  A VAT is common in most of the rest of the world as it is a tax that is relatively easy to collect, with internal checks that make underreporting difficult.  It is in essence a tax on consumption, similar to a sales tax but levied only on the added value at each stage in the production chain.  Yang notes that a 10% rate would be approximately half of the rates found in Europe (which is more or less correct – the rates in Europe in fact vary by country and are between 17 and 27% in the EU countries, but the rates for most of the larger economies are in the 19 to 22% range).

A VAT is a tax on what households consume, and for that reason a regressive tax.  The poor and middle classes who have to spend all or most of their current incomes to meet their family needs will pay a higher share of their incomes under such a tax than higher-income households will.  For this reason, VAT systems as implemented will often exempt (or tax at a reduced rate) certain basic goods such as foodstuffs and other necessities, as such goods account for a particularly high share of the expenditures of the poor and middle classes.  Yang is proposing this as well.  But even with such exemptions (or lower VAT rates), a VAT tax is still normally regressive, just less so.

Furthermore, households will in the end be paying the tax, as prices will rise to reflect the new tax.  Yang asserts that some of the cost of the VAT will be shifted to businesses, who would not be able, he says, to pass along the full cost of the tax.  But this is not correct.  In the case where the VAT applies equally to all goods, the full 10% will be passed along as all goods are affected equally by the now higher cost, and relative prices will not change.  To the extent that certain goods (such as foodstuffs and other necessities) are exempted, there could be some shift in demand to such goods, but the degree will depend on the extent to which they are substitutable for the goods which are taxed.  If they really are necessities, such substitution is likely to be limited.

A VAT as Yang proposes thus would raise a substantial amount of revenues, and the $800 billion figure is a reasonable estimate.  This total would be on the order of half of all that is now raised by individual income taxes in the US (which was $1,684 billion in FY2018).  But one cannot avoid that such a tax is paid by households, who will face higher prices on what they purchase, and the tax will almost certainly be regressive, impacting the poor and middle classes the most (with the extent dependent on how many and which goods are designated as subject to a reduced VAT rate, or no VAT at all).  But whether regressive or not, everyone will be affected and hence no one will actually see a net increase of $12,000 in purchasing power from the proposed grant  Rather, it will be something less.

b)  A Requirement to Choose Either the $12,000 Grants, or Participation in Existing Government Social Programs

Second, Yang’s proposal would require that households who currently benefit from government social programs, such as for welfare or food stamps, would be required to give up those benefits if they choose to receive the $12,000 per adult per year.  He says this will lead to reduced government spending on such social programs of $500 to $600 billion a year.

There are two big problems with this.  The first is that those programs are not that large.  While it is not fully clear how expansive Yang’s list is of the programs which would then be denied to recipients of the $12,000 grants, even if one included all those included in what the Congressional Budget Office defines as “Income Security” (“unemployment compensation, Supplemental Security Income, the refundable portion of the earned income and child tax credits, the Supplemental Nutrition Assistance Program [food stamps], family support, child nutrition, and foster care”), the total spent in FY2018 was only $285 billion.  You cannot save $500 to $600 billion if you are only spending $285 billion.

Second, such a policy would be regressive in the extreme.  Poor and near-poor households, and only such households, would be forced to choose whether to continue to receive benefits under such existing programs, or receive the $12,000 per adult grant per year.  If they are now receiving $12,000 or more in such programs per adult household member, they would receive no benefit at all from what is being called a “universal” basic income grant.  To the extent they are now receiving less than $12,000 from such programs (per adult), they may gain some benefit, but less than $12,000 worth.  For example, if they are now receiving $10,000 in benefits (per adult) from current programs, their net gain would be just $2,000 (setting aside for the moment the higher prices they would also now need to pay due to the 10% VAT).  Furthermore, only the poor and near-poor who are being supported by such government programs will see such an effective reduction in their $12,000 grants.  The rich and others, who benefit from other government programs, will not see such a cut in the programs or tax subsidies that benefit them.

c)  Savings in Other Government Programs 

Third, Yang argues that with his universal basic income grant, there would be a reduction in government spending of $100 to $200 billion a year from lower expenditures on “health care, incarceration, homelessness services and the like”, as “people would be able to take better care of themselves”.  This is clearly more speculative.  There might be some such benefits, and hopefully would be, but without experience to draw on it is impossible to say how important this would be and whether any such savings would add up to such a figure.  Furthermore, much of those savings, were they to follow, would accrue not to the federal government but rather to state and local governments.  It is at the state and local level where most expenditures on incarceration and homelessness, and to a lesser degree on health care, take place.  They would not accrue to the federal budget.

d)  Increased Tax Revenues From a Larger Economy

Fourth, Yang states that with the $12,000 grants the economy would grow larger – by 12.5% he says (or $2.5 trillion in increased GDP).  He cites a 2017 study produced by scholars at the Roosevelt Institute, a left-leaning non-profit think tank based in New York, which examined the impact on the overall economy, under several scenarios, of precisely such a $12,000 annual grant per adult.

There are, however, several problems:

i)  First, under the specific scenario that is closest to the Yang proposal (where the grants would be funded through a combination of taxes and other actions), the impact on the overall economy forecast in the Roosevelt Institute study would be either zero (when net distribution effects are neutral), or small (up to 2.6%, if funded through a highly progressive set of taxes).

ii)  The reason for this result is that the model used by the Roosevelt Institute researchers assumes that the economy is far from full employment, and that economic output is then entirely driven by aggregate demand.  Thus with a new program such as the $12,000 grants, which is fully paid for by taxes or other measures, there is no impact on aggregate demand (and hence no impact on economic output) when net distributional effects are assumed to be neutral.  If funded in a way that is not distributionally neutral, such as through the use of highly progressive taxes, then there can be some effect, but it would be small.

In the Roosevelt Institute model, there is only a substantial expansion of the economy (of about 12.5%) in a scenario where the new $12,000 grants are not funded at all, but rather purely and entirely added to the fiscal deficit and then borrowed.  And with the current fiscal deficit now about 5% of GDP under Trump (unprecedented even at 5% in a time of full employment, other than during World War II), and the $12,000 grants coming to $3.0 trillion or 15% of GDP, this would bring the overall deficit to 20% of GDP!

Few economists would accept that such a scenario is anywhere close to plausible.  First of all, the current unemployment rate of 3.5% is at a 50 year low.  The economy is at full employment.  The Roosevelt Institute researchers are asserting that this is fictitious, and that the economy could expand by a substantial amount (12.5% in their scenario) if the government simply spent more and did not raise taxes to cover any share of the cost.  They also assume that a fiscal deficit of 20% of GDP would not have any consequences, such as on interest rates.  Note also an implication of their approach is that the government spending could be on anything, including, for example, the military.  They are using a purely demand-led model.

iii)  Finally, even if one assumes the economy will grow to be 12.5% larger as a result of the grants, even the Roosevelt Institute researchers do not assume it will be instantaneous.  Rather, in their model the economy becomes 12.5% larger only after eight years.  Yang is implicitly assuming it will be immediate.

There are therefore several problems in the interpretation and use of the Roosevelt Institute study.  Their scenario for 12.5% growth is not the one that follows from Yang’s proposals (which is funded, at least to a degree), nor would GDP jump immediately by such an amount.  And the Roosevelt Insitute model of the economy is one that few economists would accept as applicable in the current state of the economy, with its 3.5% unemployment.

But there is also a further problem.  Even assuming GDP rises instantly by 12.5%, leading to an increase in GDP of $2.5 trillion (from a current $20 trillion), Yang then asserts that this higher GDP will generate between $800 and $900 billion in increased federal tax revenue.  That would imply federal taxes of 32 to 36% on the extra output.  But that is implausible.  Total federal tax (and all other) revenues are only 17.5% of GDP.  While in a progressive tax system the marginal tax revenues received on an increase in income will be higher than at the average tax rate, the US system is no longer very progressive.  And the rates are far from what they would need to be twice as high at the margin (32 to 36%) as they are at the average (17.5%).  A more plausible estimate of the increased federal tax revenues from an economy that somehow became 12.5% larger would not be the $800 to $900 billion Yang calculates, but rather about half that.

Might such a universal basic income grant affect the size of the economy through other, more orthodox, channels?  That is certainly possible, although whether it would lead to a higher or to a lower GDP is not clear.  Yang argues that it would lead recipients to manage their health better, to stay in school longer, to less criminality, and to other such social benefits.  Evidence on this is highly limited, but it is in principle conceivable in a program that does properly redistribute income towards those with lower incomes (where, as discussed above, Yang’s specific program has problems).  Over fairly long periods of time (generations really) this could lead to a larger and stronger economy.

But one will also likely see effects working in the other direction.  There might be an increase in spouses (wives usually) who choose to stay home longer to raise their children, or an increase in those who decide to retire earlier than they would have before, or an increase in the average time between jobs by those who lose or quit from one job before they take another, and other such impacts.  Such impacts are not negative in themselves, if they reflect choices voluntarily made and now possible due to a $12,000 annual grant.  But they all would have the effect of reducing GDP, and hence the tax revenues that follow from some level of GDP.

There might therefore be both positive and negative impacts on GDP.  However, the impact of each is likely to be small, will mostly only develop over time, and will to some extent cancel each other out.  What is likely is that there will be little measurable change in GDP in whichever direction.

e)  Other Taxes

Fifth, Yang would institute other taxes to raise further amounts.  He does not specify precisely how much would be raised or what these would be, but provides a possible list and says they would focus on top earners and on pollution.  The list includes a financial transactions tax, ending the favorable tax treatment now given to capital gains and carried interest, removing the ceiling on wages subject to the Social Security tax, and a tax on carbon emissions (with a portion of such a tax allocated to the $12,000 grants).

What would be raised by such new or increased taxes would depend on precisely what the rates would be and what they would cover.  But the total that would be required, under the assumption that the amounts that would be raised (or saved, when existing government programs are cut) from all the measures listed above are as Yang assumes, would then be between $500 and $800 billion (as the revenues or savings from the programs listed above sum to $2.2 to $2.5 trillion).  That is, one might need from these “other taxes” as much as would be raised by the proposed new VAT.

But as noted in the discussion above, the amounts that would be raised by those measures are often likely to be well short of what Yang says will be the case.  One cannot save $500 to $600 billion in government programs for the poor and near-poor if government is spending only $285 billion on such programs, for example.  A more plausible figure for what might be raised by those proposals would be on the order of $1 trillion, mostly from the VAT, and not the $2.2 to $2.5 trillion Yang says will be the case.

C.  An Assessment

Yang provides a fair amount of detail on how he would implement a universal basic income grant of $12,000 per adult per year, and for a political campaign it is an admirable amount of detail.  But there are still, as discussed above, numerous gaps that prevent anything like a complete assessment of the program.  But a number of points are evident.

To start, the figures provided are not always plausible.  The math just does not add up, and for someone who extolls the need for good math (and rightly so), this is disappointing.  One cannot save $500 to $600 billion in programs for the poor and near-poor when only $285 billion is being spent now.  One cannot assume that the economy will jump immediately by 12.5% (which even the Roosevelt Institute model forecasts would only happen in eight years, and under a scenario that is the opposite of that of the Yang program, and in a model that few economists would take as credible in any case).  Even if the economy did jump by so much immediately, one would not see an increase of $800 to $900 billion in federal tax revenues from this but rather more like half that.  And other such issues.

But while the proposal is still not fully spelled out (in particular on which other taxes would be imposed to fill out the program), we can draw a few conclusions.  One is that the one group in society who will clearly not gain from the $12,000 grants is the poor and near-poor, who currently make use of food stamp and other such programs and decide to stay with those programs.  They would then not be eligible for the $12,000 grants.  And keep in mind that $12,000 per adult grants are not much, if you have nothing else.  One would still be below the federal poverty line if single (where the poverty line in 2019 is $12,490) or in a household with two adults and two or more children (where the poverty line, with two children, is $25,750).  On top of this, such households (like all households) will pay higher prices for at least some of what they purchase due to the new VAT.  So such households will clearly lose.

Furthermore, those poor or near-poor households who do decide to switch, thus giving up their eligibility for food stamps and other such programs, will see a net gain that is substantially less than $12,000 per adult.  The extent will depend on how much they receive now from those social programs.  Those who receive the most (up to $12,000 per adult), who are presumably also most likely to be the poorest among them, will lose the most.  This is not a structure that makes sense for a program that is purportedly designed to be of most benefit to the poorest.

For middle and higher-income households the net gain (or loss) from the program will depend on the full set of taxes that would be needed to fund the program.  One cannot say who will gain and who will lose until the structure of that full set of taxes is made clear.  This is of course not surprising, as one needs to keep in mind that this is a program of redistribution:  Funds will be raised (by taxes) that disproportionately affect certain groups, to be distributed then in the $12,000 grants.  Some will gain and some will lose, but overall the balance has to be zero.

One can also conclude that such a program, providing for a universal basic income with grants of $12,000 per adult, will necessarily be hugely expensive.  It would cost $3 trillion a year, which is 15% of GDP.  Funding it would require raising all federal tax and other revenue by 91% (excluding any offset by cuts in government social programs, which are however unlikely to amount to anything close to what Yang assumes).  Raising funds of such magnitude is completely unrealistic.  And yet despite such costs, the grants provided of $12,000 per adult would be poverty level incomes for those who do not have a job or other source of support.

One could address this by scaling back the grant, from $12,000 to something substantially less, but then it becomes less meaningful to an individual.  The fundamental problem is the design as a universal grant, to all adults.  While this might be thought to be politically attractive, any such program then ends up being hugely expensive.

The alternative is to design a program that is specifically targeted to those who need such support.  Rather than attempting to hide the distributional consequences in a program that claims to be universal (but where certain groups will gain and certain groups will lose, once one takes fully into account how it will be funded), make explicit the redistribution that is being sought.  With this clear, one can then design a focussed program that addresses that redistribution aim.

Finally, one should recognize that there are other policies as well that might achieve those aims that may not require explicit government-intermediated redistribution.  For example, Senator Cory Booker in the October 15 debate noted that a $15 per hour minimum wage would provide more to those now at the minimum wage than a $12,000 annual grant.  This remark was not much noted, but what Senator Booker said was true.  The federal minimum wage is currently $7.25 per hour.  This is low – indeed, it is less (in real terms) than what it was when Harry Truman was president.  If the minimum wage were raised to $15 per hour, a worker now at the $7.25 rate would see an increase in income of $15.00 – $7.25 = $7.75 per hour, and over a year of 40 hour weeks would see an increase in income of $7.75 x 40 x 52 = $16,120.00.  This is well more than a $12,000 annual grant would provide.

Republican politicians have argued that raising the minimum wage by such a magnitude will lead to widespread unemployment.  But there is no evidence that changes in the minimum wage that we have periodically had in the past (whether federal or state level minimum wages) have had such an adverse effect.  There is of course certainly some limit to how much it can be raised, but one should recognize that the minimum wage would now be over $24 per hour if it had been allowed to grow at the same pace as labor productivity since the late 1960s.

Income inequality is a real problem in the US, and needs to be addressed.  But there are problems with Yang’s specific version of a universal basic income.  While one may be able to fix at least some of those problems and come up with something more reasonable, it would still be massively disruptive given the amounts to be raised.  And politically impossible.  A focus on more targeted programs, as well as on issues such as the minimum wage, are likely to prove far more productive.

Allow the IRS to Fill In Our Tax Forms For Us – It Can and It Should

A.  Introduction

Having recently completed and filed this year’s income tax forms, it is timely to examine what impact the Republican tax bill, pushed quickly through Congress in December 2017 along largely party-line votes, has had on the taxes we pay and on the process by which we figure out what they are.  I will refer to the bill as the Trump/GOP tax bill as the new law reflected both what the Republican leadership in Congress wanted and what the Trump administration pushed for.

We already know well that the cuts went largely to the very well-off.  The chart above is one more confirmation of this.  It was calculated from figures in a recent report by the staff of the Joint Committee on Taxation of the US Congress, released on March 25, 2019 (report #JCX-10-19).  While those earning more than $1 million in 2019 will, on average, see their taxes cut by $64,428 per tax filing unit (i.e. generally households), those earning $10,000 or less will see a reduction of just $21.  And on the scale of the chart, it is indeed difficult to impossible even to see the bars depicting the reductions in taxes for those earning less than $50,000 or so.

The sharp bias in favor of the rich was discussed in a previous post on this blog, based there on estimates from a different group (the Tax Policy Center, a non-partisan think tank) but with similar results.  And while it is of course true that those who are richer will have more in taxes that can be cut (one could hardly cut $64,428 from a taxpayer earning less than $10,000), it is not simply the absolute amounts but also the share of taxes which were cut much further for the rich than for the poor.  According to the Joint Committee on Taxation report cited above, those earning $30,000 or less will only see their taxes cut by 0.5% of their incomes, while those earning between $0.5 million and $1.0 million will see a cut of 3.1%.  That is more than six times as much as a share of incomes.  That is perverse.

And the overall average reduction in individual income taxes will only be a bit less than 10% of the tax revenues being paid before.  This is in stark contrast to the more than 50% reduction in corporate income taxes that we have already observed in what was paid by corporations in 2018.

Furthermore, while taxes for households in some income category may have on average gone down, the numerous changes made to the tax code on the Trump/GOP bill meant that for many it did not.  Estimates provided in the Joint Committee on Taxation report cited above (see Table 2 of the report) indicate that for 2019 a bit less than two-thirds of tax filing units (households) will see a reduction in their taxes of $100 or more, but more than one-third will see either no significant change (less than $100) or a tax increase.  The impacts vary widely, even for those with the same income, depending on a household’s particular situation.

But the Trump/GOP tax bill promised not just a reduction in taxes, but also a reduction in tax complexity, by eliminating loopholes and from other such measures.  The claim was that most Americans would then be able to fill in their tax returns “on a postcard”.  But as is obvious to anyone who has filed their forms this year, it is hardly that.  This blog post will discuss why this is so and why filling in one’s tax returns remains such a headache.  The fundamental reason is simple:  The tax system is not less complex than before, but more.

There is, however, a way to address this, and not solely by ending the complexity (although that would in itself be desirable).  Even with the tax code as complicated as it now is (and more so after the Trump/GOP bill), the IRS could complete for each of us a draft of what our filing would look like based on the information that the IRS already collects.  Those draft forms would match what would be due for perhaps 80 to 85% of us (basically almost all of those who take the standard deduction).  For that 80 to 85% one would simply sign the forms and return them along with a payment if taxes are due or a request for a refund if a refund is due.  Most remaining taxpayers would also be able to use these initial draft forms from the IRS, but for them as the base for what they would need to file.  In their cases, additions or subtractions would be made to reflect items such as itemized deductions (mostly) and certain special tax factors (for some) where the information necessary to complete such calculations would not have been provided in the normal flow of reports to the IRS.  And a small number of filers might continue to fill in all their forms as now.  That small number would be no worse than now, while life would be much simpler for the 95% or more (perhaps 99% or more) who could use the pre-filled in forms from the IRS either in their entirety or as a base to start from.

The IRS receives most of the information required to do this already for each of us (and all that is required for most of us).  But what would be different is that instead of the IRS using such information to check what we filed after the fact, and then impose a fine (or worse) if we made a mistake, the IRS would now use that same information to fill in the forms for us.  We would then review and check them, and if necessary or advantageous to our situation we could then adjust them.  We will discuss how such a tax filing system could work below.

B.  Our Tax Forms are Now Even More Complex Than Before

Trump and the Republican leaders in Congress promised that with the Trump/GOP tax bill, the tax forms we would need to file could, for most of us, fit just on a postcard.  And Treasury Secretary Steven Mnuchin then asserted that the IRS (part of Treasury) did just that.  But this is simply nonsense, as anyone who has had to struggle with the new Form 1040s (or even just looked at them) could clearly see.

Specifically:

a)  Form 1040 is not a postcard, but a sheet of paper (front and back), to which one must attach up to six separate schedules.  This previously all fit on one sheet of paper, but now one has to complete and file up to seven just for the 1040 itself.

b)  Furthermore, there are no longer the forms 1040-EZ or 1040-A which were used by those with less complex tax situations.  Now everyone needs to work from a fully comprehensive Form 1040, and try to figure out what may or may not apply in their particular circumstances.

c)  The number of labeled lines on the old 1040 came to 79.  On the new forms (including the attached schedules) they come to 75.  But this is misleading, as what used to be counted as lines 1 through 6 on the old 1040 are now no longer counted (even though they are still there and are needed).  Including these, the total number of numbered lines comes to 81, or basically the same as before (and indeed more).

d)  Spreading out the old Form 1040 from one sheet of paper to seven does, however, lead to a good deal of extra white space.  This was likely done to give it (the first sheet) the “appearance” of a postcard.  But the forms would have been much easier to fill in, with less likelihood of error, if some of that white space had been used instead for sub-totals and other such entries so that all the steps needed to calculate one’s taxes were clear.

e)  Specifically, with the six new schedules, one has to carry over computations or totals from five of them (all but the last) to various lines on the 1040 itself.  But this was done, confusingly, in several different ways:  1)  The total from Schedule 4 was carried over to its own line (line 14) on the 1040.  It would have been best if all of them had been done this way, but they weren’t.  Instead, 2) The total from Schedule 2 was added to a number of other items on line 11 of the 1040, with the total of those separate items then shown on line 11.  And 3) The total from Schedule 1 was added to the sum of what is shown on the lines above it (lines1 through 5b of the 1040) and then recorded on line 6 of the 1040.

If this looks confusing, it is because it is.  I made numerous mistakes on this when completing my own returns (yes – I do these myself, as I really want to know how they are done).  I hope my final returns were done correctly.  And it is not simply me.  Early indications (as of early March) were that errors on this year’s tax forms were up by 200% over last year’s (i.e. they tripled).

f)  There is also the long-standing issue that the actual forms that one has to fill out are in fact substantially greater than those that one files, as one has to fill in numerous worksheets in order to calculate certain of the figures.  These worksheets should be considered part of the returns, and not hidden in the directions, in order to provide an honest picture of what is involved.  And they don’t fit on a postcard.

g)  But possibly what is most misleading about what is involved in filling out the returns is not simply what is on the 1040 itself, but also the need to include on the 1040 figures from numerous additional forms (for those that may apply).  Few if any of them are applicable to one’s particular tax situation, but to know whether they do or not one has to review each of those forms and make such a determination.  How does one know whether some form applies when there is a statement on the 1040 such as “Enter the amount, if any, from Form xxxx”?  The only way to know is to look up the form (fortunately now this can be done on the internet), read through it along with the directions, and then determine whether it may apply to you.  Furthermore, in at least a few cases one can only know if the form applies to your situation is by filling it in and then comparing the result found to some other item to see whether filing that particular form applies to you.

There are more than a few such forms.  By my count, one has just on the Form 1040 plus its Schedules 1 through 5 amounts that might need to be entered from Forms 8814, 4972, 8812, 8863, 4797, 8889, 2106, 3903, SE, 6251, 8962, 2441, 8863, 8880, 5695, 3800, 8801,1116, 4137, 8919, 5329, 5405, 8959, 8960, 965-A, 8962, 4136, 2439, and 8885.  Each of these forms may apply to certain taxpayers, but mostly only a tiny fraction of them.  But all taxpayers will need to know whether they might apply to their particular situation.  They can often guess that they probably won’t (and it likely would be a good guess, as most of these forms only apply to a tiny sliver of Americans), but the only way to know for sure is to check each one out.

Filling out one’s individual income tax forms has, sadly, never been easy.  But it has now become worse.  And while the new look of the Form 1040 appears to be a result of a political decision by the Trump administration (“make it look like it could fit on a postcard”), the IRS should mostly not be blamed for the complexity.  That complexity is a consequence of tax law, as written by Congress, which finds it politically advantageous to reward what might be a tiny number of supporters (and campaign contributors) with some special tax break.  And when Congress does this, the IRS must then design a new form to reflect that new law, and incorporate it into the Form 1040 and now the new attached schedules.  And then everyone, not simply the tiny number of tax filers to whom it might in fact apply, must then determine whether or not it applies to them.

There are, of course, also more fundamental causes of the complexity in the tax code, which must then be reflected in the forms.  The most important is the decision by our Congress to tax different forms of income differently, where wages earned will in general be taxed at the highest rates (up to 37%) while capital gains (including dividends on stocks held for more than 60 days) are taxed at rates of just 20% or less.  And there are a number of other forms of income that are taxed at various rates (including now, under the Trump/GOP tax bill, an effectively lower tax rate for certain company owners on the incomes they receive from their companies, as well as new special provisions of benefit to real estate developers).  As discussed in an earlier post on this blog, there is no good rationale, economic or moral, to justify this.  It leads to complex tax calculations as the different forms of income must each be identified and then taxed at rates that interact with each other.  And it leads to tremendous incentives to try to shift your type of income, when you are in a position to do so, from wages, say, to a type taxed at a lower rate (such as stock options that will later be taxed only at the long-term capital gains rate).

Given this complexity, it is no surprise that most Americans turn either to professional tax preparers (accountants and others) to fill in their tax forms for them, or to special tax preparation software such as TurboTax.  Based on statistics for the 2018 tax filing season (for 2017 taxes), 72.1 million tax filers hired professionals to prepare their tax forms, or 51% of the 141.5 million tax returns filed.  The cost varies by what needs to be filed, but even assuming an average fee of just $500 per return, this implies a total of over $36 billion is being paid by taxpayers for just this service.

Most of the remaining 49% of tax filers use tax preparation software for their returns (a bit over three-quarters of them).  But these are problematic as well.  There is also a cost (other than for extremely simple returns), but the software itself may not be that good.  A recent review by Consumer Reports found problems with each of the four major tax preparation software packages it tested (TurboTax, H&R Block, TaxSlayer, and TaxAct), and concluded they are not to be trusted.

And on top of this, there is the time the taxpayer must spend to organize all the records that will be needed in order to complete the tax returns – whether by a hired professional tax preparer, or by software, or by one’s own hand.  A 2010 report by a presidential commission examing options for tax reform estimated that Americans spend about 2.5 billion hours a year to do what is necessary to file their individual income tax returns, equivalent to $62.5 billion at an average time cost of $25 per hour.

Finally there are the headaches.  Figuring one’s taxes, even if a professional is hired to fill in the forms, is not something anyone wants to spend time on.

There is a better way.  With the information that is already provided to the IRS each year, the IRS could complete and provide to each of us a draft set of tax forms which would suffice (i.e. reflect exactly what our tax obligation is) for probably 80% or more of households.  And most of the remainder could use such draft forms as a base and then provide some simple additions or subtractions to arrive at what their tax obligation is.  The next section will discuss how this could be done.

C.  Have the IRS Prepare Draft Tax Returns for Each of Us

The IRS already receives, from employers, financial institutions, and others, information on the incomes provided to each of us during the tax year.  And these institutions then tell us each January what they provided to the IRS.  Employers tell us on W-2 forms what wages were paid to us, and financial institutions will tell us through various 1099 forms what was paid to us in interest, in dividends, in realized capital gains, in earnings from retirement plans, and from other such sources of returns on our investments.  Reports are also filed with the IRS for major transactions such as from the sale of a home or other real estate.

The IRS thus has very good information on our income each year.  Our family situation is also generally stable from year to year, although it can vary sometimes (such as when a child is born).  But basing an initial draft estimate on the household situation of the previous year will generally be correct, and can be amended when needed.  One could also easily set up an online system through which tax filers could notify the IRS when such events occur, to allow the IRS to incorporate those changes into the draft tax forms they next produce.

For most of those who take the standard deduction, the IRS could then fill in our tax forms exactly.  And most Americans take the standard deduction. Prior to the Trump/GOP tax bill, about 70% of tax filers did, and it is now estimated that with the changes resulting from the new tax bill, about 90% will.  Under the Trump/GOP tax bill, the basic standard deduction was doubled (while personal exemptions were eliminated, so not all those taking the standard deduction ended up better off).  And perhaps of equal importance, the deduction that could be taken on state and local taxes was capped at $10,000 while how much could be deducted on mortgage interest was also narrowed, so itemization was no longer advantageous for many (with these new limitations primarily affecting those living in states that vote for Democrats – not likely a coincidence).

The IRS could thus prepare filled in tax forms for each of us, based on information contained in what we had filed in earlier years and assuming the standard deduction is going to be taken.  But they would just be drafts.  They would be sent to us for our review, and if everything is fine (and for most of the 90% taking the standard deduction they would be) we would simply sign the forms and return them (along with a check if some additional tax is due, or information on where to deposit a refund if a tax refund is due).

But for the 10% where itemized deductions are advantageous, and for a few others who are in some special tax situation, one could either start with the draft forms and make additions or subtractions to reflect simple adjustments, or, if one wished, prepare a new set of forms reflecting one’s tax situation.  There would likely not be many of the latter, but it would be an option, and no worse than what is currently required of everyone.

For those making adjustments, the changes could simply be made at the end.  For example (and likely the most common such situation), suppose it was advantageous to take itemized deductions rather than the standard deduction.  One would fill in the regular Schedule A (as now), but then rather than recomputing all of the forms, one could subtract from the taxes due an amount based on what the excess was of the itemized deductions over the standard deduction, and one’s tax rate.  Suppose the excess of the itemized deductions over the standard deduction for the filer came to $1,000.  Then for the very rich (households earning over $600,000 a year after deductions), one would reduce the taxes due by 37%, or $370.  Those earning $400,000 to $600,000, in the 35% bracket, would subtract $350.  And so on down to the lower brackets, where those in the 12% bracket (those earning $19,050 to $77,400) would subtract $120 (and those earning less than $19,050 are unlikely to itemize).

[Side Note:  Why do the rich receive what is in effect a larger subsidy from the government than the poor do for what they itemize, such as for contributions to charities?  That is, why do the rich effectively pay just $630 for their contribution to a charity ($1,000 minus $370), while the poor pay $880 ($1,000 minus $120) for their contribution to possibly the exact same charity?  There really is no economic, much less moral, reason for this, but that is in fact how the US tax code is currently written.  As discussed in an earlier post on this blog, the government subsidy for such deductions could instead be set to be the same for all, at say a rate of 20% or so.  There is no reason why the rich should receive a bigger subsidy than the poor receive for the contributions they make.]

Another area where the information the IRS would not have complete information to compute taxes due would be where the tax filer had sold a capital asset which had been purchased before 2010.  The IRS only started in 2010 to require that financial institutions report the cost basis for assets sold, and this cost basis is needed to compute capital gains (or losses).  But as time passes, a smaller and smaller share of assets sold will have been purchased before 2010.  The most important, for most people, will likely be the cost of the home they bought if before 2010, but such a sale will happen only once (unless they owned multiple real estate assets in 2010).

But a simple adjustment could be made to reflect the cost basis of such assets, similar to the adjustment for itemized deductions.  The draft tax forms filled in by the IRS would leave as blank (zero) the cost basis of the assets sold in the year for which it did not have a figure reported.  The tax filer would then determine what the cost basis of all such assets should be (as they do now), add them up, and then subtract 20% of that total cost basis from the taxes due (for those in the 20% bracket for long term capital gains, as most people with capital gains are, or use 15% or 0% if those tax brackets apply in their particular cases).

There will still be a few tax filers with more complex situations where the IRS draft computations are not helpful, who will want to do their own forms.  This is fine – there would always be that option.  But such individuals would still be no worse off than what is required now.  And their number is likely to be very small.  While a guess, I would say that what the IRS could provide to tax filers would be fully sufficient and accurate for 80 to 85% of Americans, and that simple additions or subtractions to the draft forms (as described above) would work for most of the rest.  Probably less than 5% of filers would need to complete a full set of forms themselves, and possibly less than 1%.

D. Final Remarks

Such an approach would be new for the US.  But there is nothing revolutionary about it.  Indeed, it is common elsewhere in the world.  Much of Western Europe already follows such an approach or some variant of it, in particular all of the Scandinavian countries as well as Germany, Spain, and the UK, and also Japan.  Small countries, such as Chile and Estonia, have it, as do large ones.

It has also often been proposed for the US.  Indeed, President Reagan proposed it as part of his tax reduction and simplification bill in 1985, then candidate Barack Obama proposed it in 2007 in a speech on middle class tax fairness, a presidential commission in 2010 included it as one of the proposals in its report on simplifying the tax system, and numerous academics and others have also argued in its favor.

It would also likely save money at the IRS.  The IRS collects already most of the information needed.  But that information is not then sent back to us in fully or partially filled in tax forms, but rather is used by the IRS after we file to check to see whether we got anything wrong.  And if we did, we then face a fine or possibly worse.  Completing our tax returns should not be a game of “gotcha” with the IRS, but rather an effort to ensure we have them right.

Such a reform has, however, been staunchly opposed by narrow interests who benefit from the current frustrating system.  Intuit, the seller of TurboTax software, has been particularly aggressive through its congressional lobbying and campaign contributions in using Congress to block the IRS from pursuing this, as has H&R Block.  They of course realize that if tax filing were easy, with the IRS completing most or all of the forms for us, there would be no need to spend what comes to billions of dollars for software from Intuit and others.  But the morality of a business using its lobbying and campaign contributions to ensure life is made particularly burdensome for the citizenry, so that it can then sell a product to make it easier, is something to be questioned.

One can, however, understand the narrow commercial interests of Intuit and the tax software companies.  One can also, sadly, understand the opposition of a number of conservative political activists, with Grover Norquist the most prominent and in the lead. They have also aggressively lobbied Congress to block the IRS from making tax filing simpler.  They are ideologically opposed to taxes, and see the burden and difficulty in figuring out one’s taxes as a positive, not as a negative.  The hope is that with more people complaining about how difficult it is to fill in their tax forms, the more people will be in favor of cutting taxes.  While that view on how people see taxes might well be accurate, what many may not realize is that the tax cuts of recent decades have led to greater complexity and difficulty, not less.  With new loopholes for certain narrow interests, and with income taxed differently depending on the source of that income (with income from wealth taxed at a much lower rate than income from labor), the system has become more complex while generating less revenue overall.

But it is perverse that Congress should legislate in favor of making life more difficult.  The tax system is indeed necessary and crucial, as Reagan correctly noted in his 1985 speech on tax reform, but as he also noted in that speech, there is no need to make them difficult.  Most Americans, Reagan argued, should be able, and would be able under his proposals, to use what he called a “return-free” system, with the IRS working out the taxes due.

The system as proposed above would do this.  It would also be voluntary.  If one disagreed with the pre-filled in forms sent by the IRS, and could not make the simple adjustments (up or down) to the taxes due through the measures as discussed above, one could always fill in the entire set of forms oneself.  But for that small number of such cases this would just be the same as is now required for all.  Furthermore, if one really was concerned about the IRS filling in one’s forms for some reason (it is not clear what that might be), one could easily have a system of opting-out, where one would notify the IRS that one did not want the service.

The tax code itself should still be simplified.  There are many reforms that can and should be implemented, if there was the political will.  The 2010 presidential commission presented numerous options for what could be done.  But even with the current complex system, or rather especially because of the current complex system, there is no valid reason why figuring out and filing our taxes should be so difficult.  Let the IRS do it for us.

Taxes on Corporate Profits Have Continued to Collapse

 

The Bureau of Economic Analysis (BEA) released earlier today its second estimate of GDP growth in the fourth quarter ot 2018.  (Confusingly, it was officially called the “third” estimate, but was only the second as what would have been the first, due in January, was never done due to Trump shutting down most agencies of the federal government in December and January due to his border wall dispute.)  Most public attention was rightly focussed on the downward revision in the estimate of real GDP growth in the fourth quarter, from a 2.6% annual rate estimated last month, to 2.2% now.  And current estimates are that growth in the first quarter of 2019 will be substantially less than that.

But there is much more in the BEA figures than just GDP growth.  The second report of the BEA also includes initial estimates of corporate profits and the taxes they pay (as well as much else).  The purpose of this note is to update an earlier post on this blog that examined what happened to corporate profit tax revenues following the Trump / GOP tax cuts of late 2017.  That earlier post was based on figures for just the first half of 2018.

We now have figures for the full year, and they confirm what had earlier been found – corporate profit tax revenues have indeed plummeted.  As seen in the chart at the top of this post, corporate profit taxes were in the range of only $150 to $160 billion (at annual rates) in the four quarters of 2018.  This was less than half the $300 to $350 billion range in the years before 2018.  And there is no sign that this collapse in revenues was due to special circumstances of one quarter or another.  We see it in all four quarters.

The collapse shows through even more clearly when one examines what they were as a share of corporate profits:

 

The rate fell from a range of generally 15 to 16%, and sometimes 17%, in the earlier years, to just 7.0% in 2018.  And it was an unusually steady rate of 7.0% throughout the year.  Note that under the Trump / GOP tax bill, the standard rate for corporate profit tax was cut from 35% previously to a new headline rate of 21%.  But the actual rate paid turned out (on average over all firms) to come to just 7.0%, or only one-third as much.  The tax bill proponents claimed that while the headline rate was being cut, they would close loopholes so the amount collected would not go down.  But instead loopholes were not only kept, but expanded, and revenues collected fell by more than half.

If the average corporate profit tax rate paid in 2018 had been not 7.0%, but rather at the rate it was on average over the three prior fiscal years (FY2015 to 2017) of 15.5%, an extra $192.2 billion in revenues would have been collected.

There was also a reduction in personal income taxes collected.  While the proportional fall was less, a much higher share of federal income taxes are now borne by individuals than by corporations.  (They were more evenly balanced decades ago, when the corporate profit tax rates were much higher – they reached over 50% in terms of the amount actually collected in the early 1950s.)  Federal personal income tax as a share of personal income was 9.2% in 2018, and again quite steady at that rate over each of the four quarters.  Over the three prior fiscal years of FY2015 to 2017, this rate averaged 9.6%.  Had it remained at that 9.6%, an extra $77.3 billion would have been collected in 2018.

The total reduction in tax revenues from these two sources in 2018 was therefore $270 billion.  While it is admittedly simplistic to extrapolate this out over ten years, if one nevertheless does (assuming, conservatively, real growth of 1% a year and price growth of 2%, for a total growth of about 3% a year), the total revenue loss would sum to $3.1 trillion.  And if one adds to this, as one should, the extra interest expense on what would now be a higher public debt (and assuming an average interest rate for government borrowing of 2.6%), the total loss grows to $3.5 trillion.

This is huge.  To give a sense of the magnitude, an earlier post on this blog found that revenues equal to the original forecast loss under the Trump / GOP tax plan (summing to $1.5 trillion over the next decade, and then continuing) would suffice to ensure the Social Security Trust Fund would be fully funded forever.  As things are now, if nothing is done the Trust Fund will run out in about 2034.  And Republicans insist that the gap is so large that nothing can be done, and that the system will have to crash unless retired seniors accept a sharp reduction in what are already low benefits.

But with losses under the Trump / GOP tax bill of $3.1 trillion over ten years, less than half of those losses would suffice to ensure Social Security could survive at contracted benefit levels.  One cannot argue that we can afford such a huge tax cut, but cannot afford what is needed to ensure Social Security remains solvent.

In the nearer term, the tax cuts have led to a large growth in the fiscal deficit.  Even the US Treasury itself is currently forecasting that the federal budget deficit will reach $1.1 trillion in FY2019 (5.2% of GDP), up from $779 billion in FY2018.  It is unprecedented to have such high fiscal deficits at a time of full employment, other than during World War II.  Proper fiscal management would call for something closer to a balanced budget, or even a surplus, in those periods when the economy is at full employment, while deficits should be expected (and indeed called for) during times of economic downturns, when unemployment is high.  But instead we are doing the opposite.  This will put the economy in a precarious position when the next economic downturn comes.  And eventually it will, as it always has.