Just Taxes Blog by ITEP

Sen. Warren Proposes Sweeping Tax Changes to Finance Medicare for All

Sen. Warren Proposes Sweeping Tax Changes to Finance Medicare for All

November 1, 2019

Steve Wamhoff
Steve Wamhoff
Director of Federal Tax Policy

Senator and presidential candidate Elizabeth Warren released a plan today to offset the costs of Medicare for All, a publicly funded single-payer health care program. While ITEP has not crunched the numbers, it seems likely overall that her proposals would raise trillions of dollars and leave costs and taxes either unchanged or lower for most low- and middle-income people.

Payments from Employers

Warren’s plan would convert employer payments for private health insurance into employer taxes to fund Medicare for All. Any payment made by employers on behalf of employees—whether premiums paid to private health insurers or payroll taxes—are probably borne by employees in the long-term in the form of reduced compensation. Warren’s plan basically says those costs will not change in most cases. For several years, the payments made by employers to fund Medicare for All will match the average of what they previously paid per worker for private health insurance. Eventually, the employer tax will be based on the average that companies paid for health insurance for their workers nationally.

This makes sense because costs paid by employers for their workers are ultimately borne by the workers, but only in the long-term. The short-term is very different. If Medicare for All was enacted and employers were not required to help shoulder the costs, businesses would receive an unwarranted windfall in the short-term because they would not immediately pay their savings to employees as increased compensation. Over time perhaps compensation would rise, but no one believes that process would be immediate.

The new employer tax would be calculated as 98 percent of the average cost per employee that they have paid over the past several years. It would exempt small businesses with fewer than 50 employees who were not already paying health premiums and would allow for reductions in the payments if the savings are converted to other compensation under a collective bargaining agreement.

Elimination of Employee Premiums Would Save Workers Money and Raise Revenue

The portion of premiums paid by employees for private health insurance would disappear under Warren’s plan, resulting in savings for workers and their families. While it may seem paradoxical, this would also raise revenue because the income that goes towards employee-paid premiums is typically excluded from taxable income under current law. This income would now be taxable, increasing revenue to help offset the costs of the program.

Other tax breaks related to health care would also become obsolete, including health savings accounts and the deduction for medical expenses above a certain percentage of adjusted gross income. These tax breaks would disappear, resulting in increased revenue.

Major Tax Proposals

Warren’s plan includes several significant revenue-raisers that are often discussed as potential components of sustainable tax reform.

  • Reduce the tax gap.
    Warren points out that some individuals and businesses fail to pay what they owe, either intentionally or accidentally and because Congress does not give the IRS adequate resources to enforce our tax law, reducing federal revenue by 15 percent from what it would be if all taxes owed were paid. Warren proposes reforms that are intended to raise more than $2 trillion by retrieving a fraction of the tax gap through stronger enforcement and other measures.
  • Financial transaction tax and tax on financial institutions.
    As a recent ITEP report explains, a tax on financial transactions can raise substantial revenue while reducing inequality and improving the functioning of financial markets. Warren proposes to raise $800 billion over a decade with a financial transaction tax (FTT) of just 0.1 percent on each trade of stock, bonds and derivatives.
  • Eliminate accelerated depreciation.
    Several special breaks in our tax code allow accelerated depreciation, meaning they allow businesses to deduct the cost of purchasing equipment and other capital assets more quickly than they wear out. An ITEP report explains how these breaks are enormously expensive and yet fail to achieve the oft-stated goal of increasing investment. Instead, they appear to rewards businesses for investments they would have made even in the absence of any tax break. Warren would replace these tax breaks with economic depreciation, meaning businesses would write off their purchases of equipment and other assets as they wear out.
  • Enact a worldwide tax system for offshore corporate profits.
    The law enacted by President Trump taxes the offshore profits of American corporations more lightly than domestic profits. The same was true under the old system, even though the types of tax breaks available for offshore profits were different. An ITEP report argues that the answer, one embraced by Sen. Warren in her plan, is to tax all corporate profits the same way regardless of where companies claim to earn them. This would finally eliminate the tax incentives for corporations to use accounting gimmicks making domestic profits appear to be earned in tax havens and to shift operations and jobs offshore.
  • Increase the wealth tax to 6 percent for billionaires.
    ITEP has described how a federal tax imposed directly on the net worth of the very wealthiest individuals could be used to supplement the federal personal income tax and improve the fairness of our revenue system overall. Warren’s proposal for a wealth tax initially imposed a rate of 2 percent of net worth exceeding $50 million and 3 percent of net wealth exceeding $1 billion. As part of her plan to finance Medicare for All, she has increased the rate for net worth exceeding $1 billion to 6 percent.
  • Mark-to-market taxation of capital gains.
    Warren’s proposal would subject capital gains income received by the top 1 percent to mark-to-market taxation, meaning their capital gains would be taxed annually regardless of whether they sell their assets or hold onto them. This has already been proposed by Sen. Ron Wyden, the ranking Democrat on the Senate Finance Committee. Under current law, if a wealthy person holds onto an asset that appreciates each year, that appreciation is considered an “unrealized” capital gain that is excluded from taxable income even though it is income for all practical purposes.

Warren’s Plan Is Undeniably Progressive

Warren proposes to use these changes to the health care system and tax rules, as well as immigration reform and cuts to defense spending, to offset the costs of Medicare for All. Costs and taxes for most low- and middle-income people would likely stay the same or go down. Corporations (and ultimately the well-off people who own shares in them) would likely pay more. The richest 1 percent of individuals will pay more in personal income taxes and those with the very highest net worth will pay a wealth tax. Warren’s plan would make the tax system dramatically fairer and more robust.