Friday, November 13, 2015

The Size of Government and the Fate of the Middle Class

 There's an interesting Washington Post article up today by Jim Tankersley about the Clinton and Sanders approaches to the budget/taxes and whether they would raise taxes on the middle class. (
Basically it asks whether Sanders' program whose cost he puts at $18.5 trillion over ten years, could be done without a major tax increase on the middle class. It follows on the original Laura Meckler piece in the Wall Street Journal ( ) that priced his program at $18.3 trillion with $15 trillion of it coming from his single-payer health plan.
The Sanders folks have pushed back against these estimates mostly by saying that even if his plan would increase taxes, it wouldn't make anyone but the highest income people worse off because now people would not have to pay for things under his program that cost a lot now. So if you pay $2000 more in taxes and get free health care that you currently pay $2000 in insurance costs, that shouldn't really be considered a tax increase.
I was quoted in the original WSJ article saying that an expansion of government of this size did not seem feasible to me. But the new article got me thinking about the question of even if you could conceive of it, could you enact the Sanders program without having anyone but the rich pay for it. Three data facts here make me pretty sure Tankersley is right. Sanders' program would have to hike costs on the middle class by a fair amount.
1) On the non-health side, the Sanders proposals are well above the $3.3-$3.5 trillion mentioned in the articles. Realistically, his proposals are $5 trillion+. At that size, you almost certainly need taxes on the middle class to pay for them.
I'm not basing that statement on anything being wrong in the newspapers' calculations. I'm just observing that they didn't count everything Sanders has proposed.
The WSJ analysis computed the $3.3 trillion as coming from increasing social security (+1.2t), infrastructure (+1.0t), free college (+.75t), paid leave (+.32t), and some other smaller things. The WP article added that Sanders has called for a universal child care program but the article says that's of unknown cost. Yes, it's unkown but there are numerous child care proposals we can compare to. One plan considered "universal" cost $1.6 trillion. Other, less-than-universal plans are less than a trillion so call it $500 billion and $1 trillion to be conservative. Sanders proposes a carbon fee of $1.2 trillion and pledges to redistribute 60% of the money as rebates to consumers and to use some of the other money to invest in clean energy (implying 0.7-1.2 trillion of increased spending). He has called for universal pre-K which would likely cost 70-100 billion depending on the details. So, Sanders' non-health total is actually $4.5-$5.8 trillion not $3.3 trillion.
Five trillion is a big number. It's a 3X-the-original-George W.-tax-cuts sized number. It's the same order of magnitude as many of the current Republican candidates' rather wild-eyed tax cut proposals. Could you really pay for something that big without hitting the middle class? Mind you, Sanders is not fiscally irresponsible the way the R tax plans are. He doesn't deny basic arithmetic and he has proposed ways of paying for what he wants to do. The point is that the magnitude of the spending will require a lot of revenue and it's not easy to get it without hitting the middle class. As a comparison, the original Bush tax cuts, for example, included a lot of cuts for the middle class as well as for the rich. So, if you needed to raise 3X that amount of revenue as in the Bush tax cuts and you tried just doing the reverse of those cuts times 3 as a tax increase, you would hit ordinary income people pretty hard even as you hit high income people the most. The bigger the amount of money you need, the harder it is to keep in only on high income people.
2) Sanders is right that we shouldn't just think of his single-payer health plan as a $15 trillion tax increase. We should ask whether people would be better or worse off in total. But even by that measure, lots of low and middle income workers would, in fact, be worse off and paying higher taxes.
Sanders' basic argument against the newspaper articles characterizing his health plan as needing a $15 trillion tax increase has been that we shouldn't think about tax rates alone but should ask the broader question of whether people are better or worse as a whole after the program goes into effect. If a single-payer health plan lowers health costs overall then his reasoning says that the taxes we raise for the health plan will be less than what people currently spend on health care and if we concentrate those taxes on the rich, then a typical person could actually be better off after the tax than they were before.
As a theoretical matter, that's not wrong. We should try to make that kind of calculation when we think about government programs. The thing is, though, that argument does rely quite heavily on the economic notion of "pass-though". Oversimplifying here: the Sanders health essentially plan puts all current health costs onto the government but will pay for it with cost savings and with taxes including a payroll and income taxes around 9%. Doing that frees companies from their currently massive health care costs. The Sanders plan counts on the employers then passing all of that savings though to their employees in the form of higher wages (and not keeping part of it as higher profits). If the companies don't pass it on, then, for sure, workers will end up worse off because they will pay the 9% payroll and income taxes but not have higher incomes to compensate (remember that employers pay about 75% of the normal health insurance premium for their workers so their savings on the employee contribution for health care will not normally add up to anything close to the 9% tax hike they're paying. They need the employer to pass on the other 75% to them).
So you need to decide whether companies would pass through the savings to employees. Would they? Many economists trust that markets would pass it through. Ironically, many of the Democrats that, like Sanders himself, have called for a repeal of the "Cadillac Tax" on expensive health insurance plans have implicitly presumed the opposite. They fear that the Cadillac tax will lead companies to reduce or eliminate generous health care plans without raising employee's wages in return.
But even with complete pass through, there are some significant low and middle income groups that would face net tax increases under a Sanders health plan. Generally, people that currently pay less than 9% of their income on health insurance will be worse off under a plan with free health care but a 9% tax to pay for it. That makes me think the plan hasn't been well thought through.
Almost anyone with low or moderate income getting insurance through the Obamacare exchanges, for example, will have health premia capped at rates below the Sanders 9 percent tax. A typical non-smoking family of 4 making with an income of $50,000 per year would have to pay in excess of $1000 a year more in taxes under the Sanders plan than they pay now for health insurance in the exchange You can plug in different characteristics in the Kaiser Family Foundation premium calculator to see for yourself here[0][age]=45&adults[0][tobacco]=0&adults[1][age]=50&adults[1][tobacco]=0&child-count=2&child-tobacco=0 or you could look at the JAMA stylized examples here (in real life, some of those people would have out-of-pocket expenses and deductibles when they get care, some of them would get help with those costs and we would need to weigh those against whatever co-pays they might have with a single payer plan but you get the idea).
People on Medicaid have caps on their health insurance cost at around 5% of income. So the working poor would face a net tax increase of 4% of their income. Kids with jobs but that can stay on their parents' health care plans up to age 26 under Obamacare would have to pay 9% of their income in taxes with Sanders' plan but without getting any upside from the government paid health care (though their parents would get some part of it back, depending on what they pay for the incremental coverage for the child).
I'm sure there would be other groups, too, if we worked through the numbers. His plan seems likely to hit a lot of people with tax hikes that it probably didn't intend to hit. If the employers don't pass on their savings to raise wages, it will hit all workers.
3) Sanders' plan would raise government spending more than $20 trillion over the next 10 years. It would take government expenditures as a share of GDP in the U.S. to levels equal to the big European social welfare states. Advanced countries with governments that size rely on heavy taxes on the middle class like big VAT/Sales taxes and high income tax rates that apply to large shares of their population.
Regardless of whether you think the plan to replace private health payments with a payroll tax+single-payer government program will end up hurting the middle class or not, it's still going to be an increase in government spending. Replacing private spending with public spending raises the government share of the economy. An increase of $20 trillion over ten years ($15 trillion on health and $5+ trillion on other areas)--$2 trillion per year--would mean an increase in the government expenditure to GDP ratio for the US of around by something like 11.5 percentage points.
To put that in perspective, the IMF numbers say that in 2014, U.S. government spending was around 36% of GDP (in the data here We have always been lower than the big social welfare economies of Europe. An increase in spending of the amount Sanders proposes would put us at 47.5%. That would actually put us, comfortably, in the range of the European countries, i.e., something quite different than anything in the U.S. historical experience.
The thing is, however, every advanced country that has this kind of expansive role of government in the economy pays for it with substantially higher tax burdens on middle income people. Every one of the big welfare states in Europe, for example, has a VAT/Sales tax in the 20-25% range and has high income tax rates that apply to large segments of the population, not just the top. Ordinary workers in those countries bear a larger share of the government bill than we do in the US, not a smaller share.
Could you turn the US into a Sweden-style social democracy without having the broadly based, high taxes they have in Sweden? Not really, no.
Sorry for the extended wonk-post here but I have been chewing on this for awhile. 
I think Sanders deserves solid credit for being up front and responsible in talking about his program.
By the numbers, he would expand the government a lot, as I indicate. But, he's not acting like the Republicans and denying the revenue implications of what he is proposing. He wants to expand the government's and thinks we should pay for it--that the tradeoff is worth it. You may agree with him on that expanded role for government in the economy. I get that. But be aware that most everybody will need to pay for it, not just the rich few. That's just math, I'm afraid