Robert Graboyes on the big hit to efficiency that would be caused by Medicare for All

See Medicare for All: Taxes and Tradeoffs. He is a Senior Research Fellow at Mercatus. Excerpt:

"For simplicity, let’s pretend M4A would leave overall healthcare spending unchanged, merely shifting all the spending by individuals, businesses, and states to federal taxpayers. In this scenario, there’s no $2.1 trillion in savings (as Senator Sanders anticipates), but no spending increase (as Blahous and others) anticipate.

The economic impact of M4A’s passage under this scenario depends on the distinction between lump-sum taxes and income-based taxes—principles outlined in elementary microeconomics and public finance textbooks.

With a lump-sum tax (also known as a “head tax”), everyone pays the same. In its purest form, Jeff Bezos, a middle-middle-class healthcare analyst, and a single parent earning minimum wage all pay the same. A lump-sum tax provides little or no discouragement to work harder or build a business, because the tax is static—no matter what you do. If anyone in this example gets a raise, his or her tax is unchanged. He or she enjoys the full benefit of any raise. But charging them all the same amount goes against our sense of fairness in matters of taxation.

Generally speaking, then, lump-sum taxes are efficient but inequitable. They don’t discourage work, investment, and creativity, but they’re perceived as unfair.

With an income-based tax, like personal or corporate income taxes, your tax bill rises with your income. With progressive taxation, your bill rises especially fast as you move into higher tax brackets.  Such a tax seems fair, but can discourage individuals or companies from working harder or investing. Why work harder, invest cash, and take risks if most of the rewards go to the government?
Generally speaking, then, income-based taxes are equitable but inefficient. They’re perceived as “fair,” but discourage work, investment, and creativity.

This distinction applies mostly to taxation and government expenditures, and not so much to private transactions. We object to rich and poor paying the same amount to finance schools. But for many transactions (buying clothing or a Big Mac or a plane ticket, for example), most of us don’t object to everyone paying the same price. And therein lies a serious problem with M4A.

The Agony of Tradeoffs

The core argument made by M4A supporters—that trillions in new federal healthcare spending would merely offset the trillions currently spent from other sources—sounds appealing. As Marc Goldwein of the Committee for a Responsible Federal Budget noted in a series of tweets, however, that argument ignores some real costs.

Present-day insurance premiums, Goldwein noted, somewhat resemble a lump-sum tax. If middle- and upper-income folks buy insurance policies today, they pay roughly the same price. (Medicaid and Obamacare mean that some with lower incomes probably pays less.) Hence, in the mid to upper range, health insurance premiums act as an efficient but (arguably) inequitable tax. But if you finance health insurance through federal income taxes, then the more income you earn, the more you pay for healthcare coverage. For some, that extra bite would be reason enough to work less, create less, and add less to the overall economy. This effect is particularly strong for second-earners or near-retirees, who may choose not to work at all if the return to work is low. For some investors, the difference is enough to shut down production and jobs in the US and move those investments overseas.

Goldwein’s tweets included some conjectural numbers which, he stressed, were “back of the envelope & apples-to-oranges” calculations. These rough numbers show that even “relatively efficient” sources of revenue are likely to reduce economic output by several times the purported $2.1 trillion in savings grasped by M4A backers from Blahous’s paper.

Goldwein points to a payroll tax as one plausible option for financing M4A. The Congressional Budget Office estimates a one percentage point increase in the payroll tax would raise about $100 billion in 2026, suggesting a payroll tax of 30 percent or more would be necessary to pay for M4A. As I previously calculated, this would mean tripling the payroll tax to as high as 45 percent for many workers. Such a large tax on earned income would result in significant reductions in work and the overall economy.

In other words, even if the healthcare savings touted by M4A supporters were to materialize, they would be submerged beneath a far greater loss of wages, interest, dividends, and profits.

In truth, few M4A advocates would likely support tripling of payroll taxes; some have instead proposed financing healthcare in part through taxes on the rich or even through deficits. Goldwein, in an email exchange, estimated that borrowing $33 trillion would reduce the size of the economy as measured by gross national product (GNP) by over ten percent and shrink total GNP by $15 to $20 trillion over the time period discussed in Blahous’s paper.

Goldwein has also suggested that the financing scheme put forward by Senator Sanders during the 2016 presidential campaign (60 percent financed by deficits, 25 percent by payroll tax, and 15 percent by income and capital gains taxes on high earners) “may be an even bigger hit” to the economy, producing economic losses many times the hypothetical $2.1 trillion in healthcare savings.

The claimed $2.1 trillion of savings could only appear, Goldwein notes, if the federal government structured funding as a lump-sum tax (similar to today’s private insurance premiums)—with most people (possibly including even those with low incomes) paying the same amount. But, he notes, Capitol Hill would likely view that financing structure as inequitable and politically untenable. If so, a shift from today’s mixed financing to deficit financing and income-based taxation means M4A would likely exert downward pressure on the long-term growth of the US economy (and very likely a downward jolt in the law’s first year). Again, an immediate and long-term result would almost certainly be a shift of some capital investment from the United States to foreign countries.

Still, it’s logically defensible to argue that the benefits of M4A outweigh the costs of a smaller, slower-growing US economy. But unless one is willing to argue for financing via lump-sum taxes—and practically no one is so willing—then that smaller, slower-growing economy will be part of the bargain. M4A would doubtless deliver real benefits to many Americans. But the program’s financing would almost certainly impose heavy costs on all Americans—reductions in employment, income, growth, innovation, entrepreneurship, and mobility. And once done, it essentially cannot be undone.

One can argue that the tradeoff is worthwhile—a worthy topic for debate. We can ignore the tradeoffs, but the economy will not."