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Would Medicare for All Require a Middle-Class Tax Hike?

Oct 22, 2019 | Health Care| Taxes

With several 2020 presidential candidates endorsing a move to single-payer health care (Medicare for All), there is an ongoing debate over whether such a plan would include higher taxes on the middle class. While no candidate has fully specified how he or she would pay for the cost of Medicare for All, our analysis finds fully offsetting the cost would require higher taxes on the middle class. Even with extremely aggressive revenue-raising policy changes, we only identify enough revenue increases from high earners and businesses to cover about 40 percent of the cost of Medicare for All. However, higher taxes don't necessarily mean higher costs, and depending on the details many households could end up paying less in taxes under Medicare for All than they currently pay in premiums and cost sharing.

For purpose of this Fact Check, we define Medicare for All as comprehensive single-payer health care that covers virtually all services with no (or only negligible) premiums, copayments, or other cost sharing, and we define middle class as individuals earning above $25,000 but less than $200,000 ($250,000 for families), based on a common political definition. The combination of a less generous version of Medicare for All and a broader definition of middle class might lead to a different result. 

Background

Medicare for All is a relatively amorphous term that has historically been used to describe universal or universally-available, government-provided health insurance, and it is currently being used to describe a generous single-payer plan that covers virtually all medical interventions with no networks, premiums, or cost sharing. Based on a variety of estimates from credible sources, such a plan is likely to cost the federal government $28 trillion to $32 trillion more than it would spend under current law over the next decade (a new Urban Institute study suggests costs of $27 trillion to $35 trillion under several scenarios). These costs come from expanding coverage, increasing benefit generosity, and – most significantly – eliminating current premiums, deductibles, and copayments, which are partially offset by reductions in provider, drug, and administrative costs.

Advocates of Medicare for All have generally called for financing the costs through tax increases. However, there is disagreement over whether the tax hikes would apply to the middle class.

For example, former Vice President Joe Biden has argued Medicare for All "will require middle-class taxes to go up, not down," and Senator Bernie Sanders (I-VT) has said "I do think it is appropriate to acknowledge that taxes will go up" (though premiums and other costs will fall). On the other hand, Senator Kamala Harris (D-CA) has said her "vision for Medicare For All does not include a middle-class tax hike," and Senator Elizabeth Warren (D-MA) has largely evaded the question by simply saying "costs are going to go up for the wealthiest Americans, for big corporations…and hard-working middle-class families are going to see their costs going down.”

Others outside of the presidential field have made even bolder claims. For example, Chris Talgo of The Federalist has argued that "tax burdens would double, and for tens of millions of families, the increased taxes would far outweigh not needing to pay for health insurance," while economist Gabriel Zucman says that "Medicare for All would cut taxes for the vast majority of workers" (emphasis added).

Taxes on the Rich Cannot Cover the Full Cost of Medicare for All

While there are numerous policy options available to finance the costs of Medicare for All, there does not appear to be any plausible path to finance it with tax increases on just wealthy individuals and businesses.1

To get a sense of how difficult it would be to raise $3 trillion per year from high-income earners alone, it may be helpful to understand how much income is available for taxation. Based on estimates from the Joint Committee of Taxation (with adjustments based on data from the Institute for Taxation and Economic Policy), tax units making over $200,000 per year will make about $4 trillion in after-tax income this year, while tax units with income above $500,000 will make about $2 trillion. These figures suggest that paying for Medicare for All from high earners alone would require an average tax rate close to or above 100 percent for higher earners. It would be impossible to achieve this revenue with an income tax alone.2

To give a sense of how much could be raised from high earners, we compiled an extremely aggressive list of tax increases on the wealthy and corporations with very rough (and generally optimistic) estimates of how much revenue each option would raise. The table below assumes policymakers raise the top two tax rates from 35 and 37 percent up to 70 percent, phase out most deductions and exclusions for higher incomes, double the corporate income tax rate from 21 to 42 percent, impose a tax on wealth or tax capital gains mark-to-market for high net worth individuals, establish a tax on financial transactions and large financial institutions, and pass a variety of other tax increases. Using our very rough estimates and excluding many interactions and economic feedback, we estimate these policies would raise a total of $11 trillion over a decade, enough to cover roughly 40 percent of the cost of Medicare for All.

Options to Finance Medicare for All Without Middle-Class Tax Hikes

Policy Ten-Year Revenue Raised
Raise top two individual income tax rates to 70% and eliminate pass-through deduction for everyone  ~$2 trillion
Phase out virtually all deductions and exclusions for households making over $250,000 ($200,000 for individuals), assuming 70% top rate 3 ~$2 trillion
Double the corporate income tax rate from 21% to 42% ~$2 trillion
Enact large wealth tax or mark-to-market capital gains  ~$3 trillion
Impose a tax on financial transactions and on large financial institutions  ~$1 trillion
Close corporate tax loopholes and strengthen minimum tax on foreign earnings ~$500 billion
Modify treatment of pass-through business income for calculating net investment income tax and Self Employment Contribution Act tax ~$300 billion
Restore estate tax to 2009 levels ~$300 billion
Total, excluding interactions ~$11 trillion
Percent of Medicare for All covered (assuming $30 trillion cost)  ~40%

Source: Rough Committee for a Responsible Federal Budget estimates based on Open Source Policy Center's Tax Brain, Congressional Budget Office,  Joint Committee on Taxation, Senate Finance Committee, Senator Bernie Sanders, Tax Policy Center, and Lily Batchelder and David Kamin

While the list above does not technically include all possible taxes that could be imposed on the wealthy, the policies it does include are extremely aggressive, more aggressive than may be politically or even technically possible. A top individual rate of 70 percent would almost certainly bring top marginal tax rates above their revenue-maximizing levels (including state and local rates). A 42 percent corporate income tax rate would put the total corporate tax rate at close to twice the international average and a third higher than the next highest developed nation. A wealth tax would likely lead to constitutional challenges. Moreover, these policies are likely to reduce incentives to work and invest, slowing economic growth and reducing their combined revenue stream.

It is unlikely that policymakers could agree to enact anywhere close to $11 trillion in tax increases only on the wealthy and corporations, let alone the $30 trillion needed to fund Medicare for All. As a result, funding Medicare for All will almost certainly require broad-based taxes that apply to the middle class, either directly or indirectly (for example through an employer payroll tax or consumption tax). 

Taxes Would Go Up, but Premiums Would Go Down

While taxes would need to go up on the middle class in order to pay for Medicare for All, total costs for middle-class families may go up or down – and median costs are likely to fall, as most taxes are more progressive than current premiums. 

Currently, a large share of health care is financed from individual premiums, employer-paid premiums (which ultimately result in lower wages), and out-of-pocket costs paid by individuals and families. Under Medicare for All, the government would finance these costs, resulting in lower direct health care costs for individuals and families. Essentially, premiums and cost sharing would be replaced with taxes.

Whether a family pays more or less on net under Medicare for All will depend on how the program is financed and will also differ from person to person. For example, imagine Medicare for All were financed with a broad tax equal to 25 percent of income. In that case, a single 40-year-old making $100,000 and currently paying $10,000 in premiums and cost-sharing would end up paying $15,000 more; meanwhile, a family of four making $60,000 and paying $25,000 in premiums and cost sharing would end up paying $10,000 less (these figures exclude tax and wage interactions). The more progressive the revenue stream, the fewer people who will end up paying more but the larger net increase those people will face.

Importantly, whether net costs go up or down is not the only important metric. For some, costs may go up, but so too will the health services they receive. For others, average net costs may go down, but so will the flexibility to adjust spending based on preference, need, and ability to pay. Taxes may also distort behavior and slow income growth in ways that premiums and cost-sharing do not. 

It is impossible to assess whether the middle class is better off or worse off under Medicare for All until all the plan's details – especially how to pay for Medicare for All – are specified. Even then, data and analysis will need to be supplemented with judgement calls, as many of the costs and benefits associated with Medicare for All are intangible or not directly comparable.

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Regardless of the overall impact of Medicare for All, it is clear that taxes on the middle class would have to rise in order to pay for it. Those taxes could be imposed directly on workers, indirectly through taxes on employers or consumption, or through a combination of direct or indirect taxes. There is simply not enough available revenue from high earners and businesses to cover the full cost of eliminating premiums, ending all cost-sharing, and expanding coverage to all Americans and for (virtually) all health services. But in exchange, the absence of premiums and cost-sharing could represent a net gain or loss to individuals' finances depending on how much they currently pay, how much they currently make, and how the ultimate financing is structured.

Policymakers would be wise to begin identifying possible financing sources so they can evaluate the relative merits of their choices. This year, the Committee for a Responsible Federal Budget will publish a paper designed to illuminate these choices and their consequences.

Claim: Middle-Class Taxes Will Need to Rise to Finance Medicare for All

Ruling: Largely True

This Fiscal FactCheck is a part of our US Budget Watch 2020 project, which will explain, score, and factcheck claims and policy proposals made during the 2020 campaign. If you think we missed an important claim and would like us to look into it, contact us at info@crfb.org and we'll do our best to look into it. Learn more about US Budget Watch 2020 here.


1 Technically, more revenue could be raised from those below the middle class. However, looking to low-income families for revenue would be an overly literal interpretation of the claim as it is hard to imagine a proponent of Medicare for All opposing tax increases on the middle class but supporting them for the poor. Moreover, those making less than $25,000 per year only make about half a trillion in total net income. And the only realistic way to target tax hikes exclusively on low income households would be to repeal the refundable portion of tax credits, which would only raise about $900 billion over a decade.

2 JCT's definition of income is modestly broader than the total cash income a household receives in a year, but narrower than many economic definitions of income. Still, taxing all cash income would likely require marginal rates well above 100 percent and would therefore be impossible -- taxpayers would reduce their income in response. Other forms of taxes – such as a wealth tax or financial transaction tax – can lift the effective rate on high earners without as large an increase in the marginal rate for more income. However, even if average tax rates could be raised above 100 percent while keeping marginal tax rates near their revenue maximizing level, the high average tax rates would erode the tax base over time and therefore could not lead to a stable revenue stream. 

3 This should be viewed as a very high end estimate. Actual revenue from a realistic policy to phase out tax breaks for high earners is likely to be significantly lower.