America Might Be Ready for Democratic Socialism. It’s Not Ready for the Bill.
Single-payer health care, a jobs guarantee, and free college would require massive tax hikes. There’s no way around it.
Democratic socialism is having a moment. Sen. Bernie Sanders mobilized millions of voters during the 2016 campaign, nominally as a Democrat but with many self-professed socialists in his bandwagon. And Alexandria Ocasio-Cortez will likely bring her own brand of socialism to Congress next year, having knocked off New York Rep. Joe Crowley in a primary.
However, the democratic socialist agenda will face resistance not only from other lawmakers but from basic math. Their promises, which include free college, a single-payer health care system, guaranteed jobs, and more, would require astonishingly high expenditures that would cause the federal deficit to skyrocket. Once the costs become clear, most mainstream politicians and voters will surely balk. Making big promises is one thing; paying for them is another.
Adding up the proposals, using nonpartisan and left-leaning sources
Let’s add up the cost of the popular far-left proposals, something very few breathless discussions of the democratic-socialism trend do.
Last week, the Mercatus Center, a libertarian-leaning center at George Mason University, estimated that Sanders’s Medicare-for-all plan would cost the government $32 trillion over the next decade, setting off an intense debate. But we can do this budget exercise using only figures from nonpartisan and even left-leaning groups.
To begin with the necessary context: The Congressional Budget Office (CBO) assumes a baseline budget deficit of $12.4 trillion over the next decade (assuming current laws continue). And even these projections assume that last year’s tax cuts expire on schedule, though they may well be renewed, and that the recent two-year discretionary spending hike is not renewed in 2020. Most of this deficit is driven by the escalating Social Security and Medicare system deficits.
From that baseline, Sanders has proposed a Social Security expansion, including higher cost-of-living adjustments and higher minimum benefit levels, that the liberal Tax Policy Centerestimates will cost $188 billion over the next decade.
The Tax Policy Center also scores the Sanders “free college” proposal at $807 billion over the next decade. (Note that free college benefits students from wealthy families and those whose tuition is currently affordable.)
Next, the center estimates that Sanders’s proposal of up to 12 weeks of paid family leave for new parents and for people with serious health conditions would cost another $270 billion.
Those costs, however, pale beside the cost of replacing private insurance, including copayments, with a Medicare-for-all plan. The liberal Urban Institute estimates that Sanders’s single-payer health plan would add $32 trillion in federal costs over the decade. Note that that’s the exact same figure produced by those George Mason libertarians. (Yes, there are important caveats to that number; I discuss them below.)
Ocasio-Cortez and Senate Democrats also want to guarantee a job for anyone who wants one, at $15 per hour plus benefits. The liberal Center on Budget and Policy Priorities, commissioned a report by outside scholars Darrick Hamilton, William Darity, and Mark Paul that estimates the cost of a more modest proposal along these lines (with a lower wage, for example). It suggested the cost would be $56,000 apiece for 9.7 million enrollees, for a total of $6.8 trillion over the next decade.
Yet this enrollment estimate for the jobs program is drastically low. The Center on Budget and Policy Priorities-commissioned report assumes nearly all participants would come from the ranks of the jobless who are seeking work. Realistically, the 60 million Americans currently earning less than $15 per hour (plus many retirees and longtime labor force dropouts) would also stampede into this program.
The report asserts that employers would retain such workers with large raises, or a higher minimum wage. But clearly some of these 60 million workers would be laid off and possibly replaced with automation, particularly in industries with tight profit margins. Those job losses would expand this program’s participation, as would an influx of workers who simply want an easier job or more hours than their current jobs.
Still, in the spirit of generosity, we will assume for the purposes of a rough calculation that the center’s figure is correct — while keeping in mind that the actual cost could easily triple that amount
Finally, Senate Democrats have promised $1 trillion for new infrastructure, and House Democrats are rallying around legislation to pay off all $1.4 trillion in student loan debt — both of which the far left generally supports. I will exclude vague promises such as universal pre-K and expanded special education funding.
Total cost: $42.5 trillion in new proposals over the next decade, on top of the $12.4 trillion baseline deficit.
To put this in perspective, Washington is currently projected to collect $44 trillion in revenues over the next decade. And the Republican tax cut, decried universally by Democrats as irresponsible (and by Minority Leader Nancy Pelosi as “Armageddon”) will cost less than $2 trillion over the decade.
The 30-year projected tab for these programs is even more staggering: new proposals costing $218 trillion, on top of an $84 trillion baseline deficit driven by Social Security, Medicare, and the resulting interest costs.
What would be the effects of such an unprecedented spending binge? Federal spending, which typically ranges between 18 and 22 percent of GDP, would immediately soar past 40 percent of GDP on its way to nearly 50 percent within three decades. Including state and local government spending would push the total cost of government to 60 percent of GDP by that point — exceeding the current spending level of every country in Europe.
No, single-payer doesn’t just involve a straightforward shift from private payments to taxes
These numbers are not partisan. They come from the Congressional Budget Office, top liberal think tanks, and the lawmakers themselves. They are the left’s own figures. (And note that we included an absurdly low-cost estimate for the jobs guarantee.)
Nevertheless, many advocates claim that single-payer health care will not worsen America’s fiscal problem, and may even be part of the solution. These plan scores show otherwise.
First, single-payer would not “fix” Washington’s current unsustainable health spending, as its advocates often claim. Medicare’s existing $6 trillion cash shortfall over the next decade (which soars to a $40 trillion shortfall over 30 years) would not be reduced because Medicare is already a price-controlled, single-payer system that would merely become more generousunder Medicare-for-all. Perhaps advocates should pay for Medicare’s existing obligations before expanding the system to everyone else.
Second, single-payer proponents claim that the $32 trillion single-payer cost should be considered differently from the other expenditures, since, in theory, money spent privately on health insurance and other health-care costs would now be spent by the government. Essentially, goes the argument, the dollars that went to health premiums and copays would instead go to taxes, with no one worse off.
The Urban Institute score shows otherwise. The $4 trillion saved by state and local governments on programs like Medicaid and CHIP, over 10 years, and the $22 trillion saved by families and businesses on premiums and out-of-pocket expenses cannot easily be converted into a $26 trillion “single-payer tax” without serious economic and redistributive side effects.
Designing a politically acceptable $26 trillion tax hike, even if families and businesses would then have more money, is nearly impossible. CBO data suggest that a new payroll tax, which is one of the “pay-fors” Sanders has emphasized, would need to be set at 29 percent in order to raise $26 trillion over the decade. And that is on top of the existing 15.3 percent payroll tax and all other federal and state taxes.
Hardest hit would be the 77 million Medicaid recipients who currently pay no health insurance premiums (just limited copays), and thus would not receive any “insurance premium windfall” to help pay for their steep new taxes. Overall, converting these $26 trillion in savings into a “single-payer tax” is so difficult that Sanders’s own page of tax increase options comes up with just $16 trillion. And even those tax scores are not independently verified, are often politically unrealistic, and fail to account for any revenues lost to interactions between tax proposals or macroeconomic responses.
What’s more, even if Washington could tax all $26 trillion saved by families, businesses, and state governments, there remains a final $6 trillion federal cost that represents the increase in total national health spending.
Yes, according to the Urban Institute and others, the Sanders plan raises US health spending. This is because American single-payer proposals are far more generous than other nations’ systems; its population is less healthy; and, most overlooked, America decided decades ago to invest more heavily than other nations in expensive technology, roomy hospitals, and pharmaceutical research.
Maintaining this larger infrastructure costs money and limits how deeply provider payments can be cut to pay for the substantial coverage expansions. All of this helps explain why a single-payer system would cost more in America than in other nations.
George Mason’s Mercatus Center study did find that single-payer would reduce projected national health spending by 2 percent. But it did so by charitably assuming Sanders’s immediate (and implausible) 40 percent cut in provider payments would occur. (When, in passing, the center examined more modest and realistic provider payment reductions, it found the plan would cost an additional $5.4 trillion.)
The Urban Institute score also assumes that payment rates could fall significantly, but to a lesser degree than the Mercatus Center. And the liberal economist Kenneth Thorpe of Emory University, who has designed single-payer legislation himself and is considered sympathetic to this approach, found a price tag for the Sanders plan similar to that of the Urban Institute.
Regardless of whether national health expenditures slightly rise or fall, virtually every analysis — liberal or conservative — agrees that Washington must come up with roughly $30 trillion to finance single-payer health care.
And here is a key point: Even setting aside the feasibility of a 40 percent cut to health providers, I have yet to come across even one specific single-payer proposal that raises anywhere close to the roughly $30 trillion needed to pay for the new system (much less “solves” the existing Medicare deficit, as is often claimed).
The Sanders 2016 campaign’s single-payer plan came up $14 trillion short, and his new legislation ignores the tax side altogether. If converting all the health savings from state governments, businesses, and families into a “single-payer tax” is so easy, why has no one come up with a blueprint? Until there is an actual plan that includes the necessary taxes, a fiscally responsible single-payer system will remain a fiction
Paying for socialism
According to the left’s own sources, democratic socialism will cost $42.5 trillion in its first decade. How would the US pay for it?
Under the most generous assumptions possible, liberal proposals would cut $8.5 trillion on the spending side. To begin with, state governments no longer burdened with health care costs would save $4.1 trillion, according to the Urban Institute. The popular leftist goal of slashing defense spending down to Europe’s target of 2 percent of GDP, for which there is no plausible blueprint, would nonetheless save $1.9 trillion if achieved, according to CBO data. Charitably assuming that the jobs guarantee would reduce antipoverty spending by one-quarter would save $2.5 trillion.
Paying for the remaining $34 trillion would require nearly doubling federal tax revenues. Let’s examine three paths using data from CBO’s menu of budget savings:
- What about just taxing corporations and rich families? Raising the final $34 trillion would require seizing roughly 100 percent of all corporate profits as well as 100 percent of all family wage income and pass-through business income above the thresholds of $90,000 (single) or $150,000 (married), and absurdly assuming they all continue working. (This calculation refers to individual income, not investment income.)
- How about a European-style value-added tax (VAT), which is basically a national sales tax? A rate of 87 percent would be needed to collect $34 trillion under the American tax base.
- What about payroll taxes? Lawmakers would need to create a new 37 percent payroll tax, on top of the existing 15.3 percent payroll tax, in order to collect $34 trillion.
And the taxes do not stop there. There is still that aforementioned baseline budget deficit of $12.4 trillion over the decade, and $84 trillion over 30 years (driven almost exclusively by growing Social Security and Medicare shortfalls). It is not sustainable to allow budget deficits to swell to nearly 10 percent of GDP during peace and prosperity. So tack on an additional across-the-board income tax hike of 15 percentage points just to pay for the growing costs of our current federal programs.
Mix and match these tax policies and it still represents an unfathomable and impossible tax burden. American taxes would be higher than most of Europe because its spending levels would also be higher. (Our health care system would still cost more, and Europe does not have an expensive government job guarantee.)
Taxing the rich is not enough. America would need to match, or even surpass, Europe’s enormous tax burden on the middle class. There is no evidence that American voters will accept this level of taxation.
Democratic socialists are disingenuously cagey about the exorbitant tax burden they require. Alexandria Ocasio-Cortez recently offered a list of tax increases — such as a 28 percent corporate tax rate, a “Buffett tax” on millionaires, and carbon tax — that collectively add up to just $2 trillion over the decade, according to the CBO.
More broadly, advocates often downplay the cost of their proposals by introducing them one at a time, hiding the cumulative costs, and recycling the same tax increases across different proposals. But the 2017 tax cuts can be repealed only once. And tax rates on the rich can be raised only so many times.
If democratic socialists and their allies are serious, they must move beyond slogans and figure out how to pay for these proposals, or scale them back to plausible levels similar to last year’s tax cuts (which cost a comparatively small $1.8 trillion).
The democratic socialists may do well in November. Yet upon arriving in Washington, they will discover that even their revolution cannot repeal the laws of math.
This piece originally appeared at Vox
Brian M. Riedl is a senior fellow at the Manhattan Institute. Previously, he worked for six years as chief economist to Senator Rob Portman (R-OH) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Follow him on Twitter here.
This piece originally appeared in Vox