In the 1980s, the Reagan administration reduced top marginal tax rates by a significant percentage. The theory was that some of the benefits would “trickle down” from senior executives to lower-paid individuals, thereby providing perhaps all employees with an indirect benefit. On the surface, the concept made sense-although Reagan’s economists failed to factor in one major problem: GREED.
In 1978, the CEO (Chief Executive Officer)- worker compensation ratio was about 30 to 1. By 2018, according to the AFL-CIO Labor Federation, it had ballooned to 287-1.
Over the years, those that disparaged Reagan’s program came to refer to it as “Voodoo Economics”.
Recently, Bernie Sanders released some details concerning his proposal to provide Medicare for All. As I will show you, the various components of his plan take the concept of Voodoo Economics to a whole new level.
Many of Bernie’s numbers are presented as Trillions of dollars of expenditures and revenues over a ten-year period. First of all, virtually nobody really thinks in terms of Trillions. I would hazard a guess that most of us don’t even know how many zeros are in a Trillion. There are 12. (I looked it up.)
There are approximately 330 Million people in the U.S. According to the latest data from Forbes Magazine, only 46 Americans have a net worth of greater than $10 Billion. (Nine zeros.)
Beyond the issue of forcing readers of his plan to think in unfathomable numbers, Bernie makes his calculations based on ten-year projections. I submit that, today, especially given what’s happening out there in the real world, ten-DAY projections are probably suspect.
It would make much more sense to me if his campaign were to develop numbers based on costs and revenues per person.
Below are my comments on the “information” contained on Bernie’s website. The stuff in italics consist of the actual wording.
“According to a February 15, 2020 study by epidemiologists at Yale University, the Medicare for All bill that Bernie wrote would save over $450 billion in health care costs and prevent 68,000 unnecessary deaths – each and every year.
What our current system costs over the next decade:
Over the next ten years, national health expenditures are projected to total approximately $52 trillion if we keep our current dysfunctional system.
How much we will save:
According to the Yale study and others, Medicare for All will save approximately $5 trillion over that same time period.
$52 trillion – $5 trillion = $47 trillion total “
In 2017, U.S. medical costs per capita were $10,209. Let’s assume they are currently about $11,000. Based on a population of 330 Million, the total outlay is about $3.6 Trillion. So, over ten years, $52 Trillion might be a reasonable number.
However, Bernie goes on to say that his Medicare for All will save $5 Trillion over ten years. Simple math equates that to a 10% savings. Hardly worth the effort. Also, he makes no reference to the Federal budget annual deficit. All other components of the overall budget aside, what effect would healthcare spending at this level have in the future?
One factor that must be considered is that, if private insurance is effectively eliminated and all costs are billed to Medicare, the administrative job losses in the insurance industry, medical offices and hospitals would potentially be catastrophic. Somehow, any Medicare for All program should definitely factor in the costs of retraining many thousands of people.
Bernie’s website then states:
“How we pay for it:
Current federal, state and local government spending over the next ten years is projected to total about $30 trillion.
The revenue options Bernie has proposed total $17.5 Trillion
$30 trillion + $17.5 trillion = $47.5 Trillion total “
Bernie is apparently saying that government (at all levels) must be prepared to pay an average of $3 Trillion a year for the next ten years out of annual budgeted revenues to pay for national healthcare. It is not clear what portion of the cost will be borne by the Federal government, but it should be noted that the current annual budget deficit is over $1 Trillion a year and is rising.
Then he states that, to keep overall net costs down to “only” $47 Trillion, his plan needs to generate additional revenues of $17.5 Trillion over the next ten years.
So , now on to the details of how this $17.5 Trillion is to be raised.
“… options include:
- Creating a 4 percent income-based premium paid by employees, exempting the first $29,000 in income for a family of four.
In 2018, the typical working family paid an average of $6,015 in premiums to private health insurance companies. Under this option, a typical family of four earning $60,000, would pay a 4 percent income-based premium to fund Medicare for All on income above $29,000 – just $1,240 a year – saving that family $4,775 a year. Families of four making less than $29,000 a year would not pay this premium.
(Revenue raised: About $4 trillion over 10 years.)”
To sum up, Bernie suggests imposing a 4% income-based premium on family income over $29,000 a year. On average, he says, the annual cost per family would be about $100 a month.
There are a number of problems that such a simplistic proposal doesn’t consider.
- What is income? Is it salary only? Does it include self-employment income? What about investment income? Is it gross income, adjusted gross income (AGI) or taxable income?
- Under current tax laws, spouses are permitted to file separate returns and need not disclose their respective incomes to each other. Bernie’s suggested health insurance premium calculated per family would negate that option.
- Assume a married couple earns a total of $60,000, while their neighbor is single and earns the same amount, should they both pay the same $1,240 a year? 4%x ($60,000-$29,000)?
It is true that the MEDIAN household income in 2018 (the most recent year for which statistics are available) was just over $63,000. However, the number of people earning less than $30,000 accounted for 46.5% of the population.
As I already mentioned, there are about 330 Million people in the U.S. According to U.S. Census figures, about 22.4% are under age 18. That leaves us with 256 Million adults. National Institute of Disability figures estimate that about 10.6% of Americans between ages 18 and 64 are disabled. Subtracting these, leaves us with about 230 Million people.
I suggest that each non-disabled adult be required to pay a Medicare premium of $100 a month, i.e. $1,200 per annum. ( I would also levy a $50 a month additional premium on smokers. Although I have some ideas on how to enforce this levy, I would like to put this concept on the back burner for now.)
You might ask : “what about students and seniors?”. I believe it is likely that the next government will take steps to reduce the cost of post-secondary education so that $100 a month should be affordable for students. Insofar as seniors are concerned, $100 a month is a great deal less than the present cost of Medicare Part B and private supplemental insurance costs.
Enforcement of this levy may be problematic, although, with proper record-keeping, arrears could be withheld from social assistance payments or income tax refunds.
I believe social responsibility is a two-way street. While government is obligated to protect its citizens, individuals owe a duty to their country as well. What do you think?
Premiums of $1,200 a year from 230 Million people would produce a revenue of $276 Billion a year and possibly in the neighborhood of $3 Trillion over ten years. Not quite as optimistic as Bernie’s proposal. Sorry!
Please keep in mind that Bernie’s proposal does not place any upper limit on his Medicare premium. So, for wealthy people, this measure would increase their tax bite by an additional 4%- beyond the general increase in the top marginal rate that I discuss next.
- “ Raising the top marginal income tax rate to 52% on income over $10 million.”
(Revenue raised: About $700 billion over 10 years.)
The top marginal tax rate is now 37% on taxable incomes over $518,400 ($622,050 if married and filing jointly). There is also a 3.8%surtax on certain investment income of high earners. I assume that the 52% that Bernie recommends would phase in gradually on incomes between $600,000and $10 Million.
Even if I’m wrong and the Federal tax rate for taxable incomes below $10 Million would remain at between 37% and 40% (plus the 4% that I discussed previously), you should note that only about 16,000 people out of our entire population report income over $10 Million. According to an article I read in The Motley Fool, these few currently “only pay” about $90 Billion in taxes. It is certainly possible that a higher tax rate would generate an average of $70 Million in additional taxes over the next ten years.
Under Bernie’s plan, when state income taxes and Medicare levies are considered, the upper income tax bite could easily exceed 60 or 65%. Personally, I have difficulty supporting a system where government takes away more than half of anyone’s earnings. But that is only my personal view. I recognize that many of the 16,000 are entrepreneurs who have developed new businesses and technologies and have created many American jobs.
The good news is that the top 16,000 would no longer be able to afford to support politicians running for the Presidency or Congress. The bad news is that the NBA would relocate to Europe and MLB would move its operations to Japan.
Bernie further recommends
- “Imposing a 7.5 percent income-based premium paid by employers, exempting the first $1 million in payroll to protect small businesses.
In 2018, employers paid an average of $14,561 in private health insurance premiums for a worker with a family of four. Under this option, employers would pay a 7.5 percent payroll tax to help finance Medicare for All – just $4,500 – a savings of more than $10,000 a year.
(Revenue raised: Over $5.2 trillion over 10 years.)”
According to Kaiser Family Foundation, in 2018 employers paid an average of $12,773 for family health insurance, but only $5,655 for single coverage. The “savings of more than $10,000 a year may be somewhat overstated. The $4,500 premium cost assumes an average wage of $60,000. (7.5%x $60,000 =$4,500).
My main concern here, however, is that the wording is sloppy. A payroll tax and an income-based premium are not the same thing. I assume Bernie is making his calculations based on payroll and not the profit or sales of the employer.
I did some research and found that, in 2018, total U.S. wages and salaries were about $ 8.4 Trillion (Source :Federal Reserve Bank of St. Louis). I also found that that there are over 30 Million small businesses in the US with fewer than 500 employees. I really can’t calculate how many businesses with annual payrolls under $1 Million would be exempt from this 7.5% levy and how many would be only mildly affected. .
For example, a business with ten employees earning an average of $60,000 would be completely exempt, while a business with 20 employees earning an average of $60,000 each would pay 7.5% on $200,000. ($1,200,000- $1,000,000).
What I can calculate is that 7 .5% x $8.4 Trillion ( ignoring the small business exemption )= $630 Billion. Over ten years , this would amount to $6.3 Trillion. So, I can conclude that Bernie’s revenue figure is reasonable when considering the exemption.
- Eliminating health tax expenditures, which would no longer be needed under Medicare for All.
(Revenue raised: About $3 trillion over 10 years.)
At the very beginning of this article, I quoted Bernie’s reference to a Yale Study that projected Medicare for All would reduce the cost of national healthcare from $52 Trillion by $5 Trillion over ten years.
Bernie then set out to explain how his proposals would generate $17.5 Trillion over ten years to bring the burden down to just under $30 Trillion .
In this section of his platform, he states that eliminating unneeded healthcare costs of $3 Trillion would comprise part of the $17.5 Trillion package.
The point, however, is that the Yale study already stipulates a potential cost savings of $5 Trillion! In other words, unless I have missed something, Bernie is double-counting cost savings.
Again, I believe that retraining program costs need to be estimated with respect to insurance industry and medical administrative personnel. I don’t know if the Yale study considered this.
- “Replacing the cap on the state and local tax deduction with an overall dollar cap of $50,000 for a married couple on all itemized deductions.
(Revenue raised: About $400 billion over 10 years.)”
“Itemized Deductions” on Schedule A are divided into Four major Categories:
1.Medical and Dental expenses, generally in excess of 7.5% of Adjusted Gross Income (AGI)
2.Mortgage Interest (and possibly investment interest)
3.State and Local Taxes
- Gifts to Charity
Medical expenses have never been much of an issue for ultra- high income earners because they are not likely to spend more than 7.5% of AGI -especially in the future if the U.S. adopts some form of Medicare for All.
Home mortgage interest is generally limited to interest paid on up to $750,000 of indebtedness. At, say 4%, that would amount to $30,000 in a year.
Next, let’s assume that wealthy people pay at least $20,000 a year in property taxes and/or state income taxes.
That brings the total available claim up to Bernie’s proposed $50,000 maximum.
Bottom line: If these rules are ever implemented, there would be no room for wealthy people to deduct charitable contributions, which are currently allowed up to 50% of AGI.
Need I say more?
- “Taxing capital gains at the same rates as income from wages and cracking down on gaming through derivatives, like-kind exchanges, and the zero-tax rate on capital gains passed on through bequests.
(Revenue raised: About $2.5 trillion over 10 years.)”
Historically, in order to benefit from a favorable tax rate on capital gains of (generally) 15%, assets are required to be held for at least 365 days. The purpose of the rules is to reward investment and penalize speculation. I could understand changing the rules so that, for example, if property is held for only one year, the tax rate becomes 30% and one would need to retain property for at least two years to benefit from the 15% rate. However, to completely discourage risk-taking makes no sense to me.
As far as derivatives are concerned, most people don’t even know what they are. They only know that the crash in 2008 resulted largely because of fraud in mortgage portfolio sales. However, absent fraud, derivatives are certainly a valid form of investment.
Like kind exchanges are designed to facilitate business expansion. If, for example, assume that a business owns a warehouse and the business is expanding. Current tax rules allow the entity to sell the old property and defer taxes on gains in order to provide additional funds for the acquisition or construction of another (generally larger) property. The rules provide for a postponement of taxes- not a forgiveness. These rules are not intended as a tax-dodge.
Bernie also complains about the “zero tax rate on capital gains passed on through bequests”. However, the estate tax is based on current values of property, which includes accumulated previously untaxed gains. If these gains are taxed when realized at Bernie’s proposed top tax rate of 52% and also at his proposed maximum estate tax rate of 77% (my next topic)…. Well, you don’t need me to do the math.
As to his revenue projection of $2.5 Trillion over ten years, there is no way to project capital gains over one year, let alone over ten years. Given the behavior of the market over the last two weeks, there may very well be no capital gains to tax in the foreseeable future.
- “Enacting the For the 99.8% Act, which returns the estate tax exemption to the 2009 level of $3.5 million, closes egregious loopholes, and increases rates progressively including by adding a top tax rate of 77% on estate values in excess of $1 billion.
(Revenue raised: $336 billion over 10 years.)”
My research tells me that there are currently about 620 Billionaires in the U.S. and that there are about 4,665,000 households with a net worth over $3 Million. That is roughly 3.7% of all households.
In many cases, estate taxes have traditionally been minimized through the use of family trusts and charitable bequests. Even if the entire trust tax structure is overhauled, it is generally accepted that tax changes are not applied retroactively Moreover, historically estate taxes can be postponed for married taxpayers until both spouses die. So, if a 75-year-old Billionaire marries a 25-year-old person, and bequeaths all of his or her assets to the younger spouse, the Feds might have to wait a long time to collect.
In 2009, the last year that the estate tax exemption was pegged at $3.5 Million, the estate tax collected (according to the Tax Policy Center) was $13.6 Billion. Although it is impossible to predict when people will die , it is not unreasonable to project $336 Billion in revenue over ten years, given the growth in top-end wealth over the last ten years and if Bernie’s proposal is adopted virtually doubling the top tax rate from 40% to 77%.
The philosophical issue is whether it is equitable for less than 5% of our population to carry the other 95%.
- “Enacting corporate tax reform including restoring the top federal corporate income tax rate to 35 percent.
(Revenue raised: $3 trillion ,of which $1 trillion would be used to help finance Medicare for All and $2 trillion would be used for the Green New Deal.)
- Using $350 billion of the amount raised from the tax on extreme wealth to help finance Medicare for All.”
I certainly believe that corporate tax rates should be increased from the 21% level set by the Trump administration. However, I strongly suggest that the increase should only apply to large (generally publicly owned) corporations.
Other countries, such as Canada, have a dual-rate structure. For example, Canadian-Controlled private companies pay a low rate on the first $500,00 of annual domestic business profits. Small businesses in the U.S. also need a low tax rate to expand and remain competitive in both domestic and global markets.
However, simply adjusting tax rates for large businesses is not enough. Even though machinery, equipment, computers and furniture can be expected to have value for a number of years, the Trump tax changes presently permit the entire cost to be expensed in the year acquired (actually “put into service”). So, if a business earns $1 Million and buys equipment for $1 million , its taxable income becomes zero. For accounting purposes, they might perhaps only record depreciation of, say, $100,000 and they would then report a profit of $900,000 to their investors.
The 2019 Federal budget reflected anticipated corporate taxes of $225 Billion. If corporate tax rates are increased and the biggest loopholes are closed, it is probably reasonable to project $300 Billion a year and a total of $3 Trillion over ten years.
Conspicuous by its Absence
To make Medicare for All viable, I believe there are other measures that are sorely needed but, so far, are not part of Bernie’s platform.
Some of these include:
1.Legislation to restrict malpractice awards (except in cases of criminal negligence). If physicians and medical facilities were permitted to pay substantially reduced insurance premiums, they could afford to accept smaller fee payments.
- Based on my experiences as a resident of Canada for many years, I recommend that physicians be allowed to charge a nominaloptionalfee of $20 for an office visit. The purpose would be to discourage frivolous appointments and increase overall efficiency. Obviously, if recurring visits are mandated by a physician for follow-up, the fee would be waived.
- In order to better regulate prescription costs, I would ban drug TV advertising. Personally, I would never take it upon myself to recommend medications for myself when speaking to a doctor. I expect the practitioner to prescribe what he or she deems best. Besides, the TV ads spend more time listing (potentially lethal) side effects than extolling the virtues of the advertised products.
- Finally and most important: A few weeks ago, I had an article published that was titledWarfare or Healthcare-That is the Question.In this article I analyzed the 2019 Federal Budget and I explained why Medicare for All is not viable unless the Federal government drastically reduces the defense budget. I presented a table that shows how the U.S. spends more annually on its military than the next ten biggest spenders combined- including Russia and China.
Canada introduced Medicare for All in 1967 and, today, of all the “First-World” countries, the U.S. and Japan are the only ones that have not adopted socialized medicine. Not one country that took the plunge has ever reverted to a U.S.-based model.
As a country, we have a great deal to consider in the coming years. Whether to reduce defense spending is one of the major issues. Whether the few should shoulder the burden for the many as Bernie Sanders recommends is another.