Election 2016: Do Sanders’ Economic Plans Add Up? The Cost Of His ‘Revolution’

Listen to Democratic presidential aspirant Bernie Sanders and he is pursuing no less than a modern-day revolution, a massive transfer of wealth from the most affluent households to everyone else. At the center of his plans are promises to force the richest Americans to pay much steeper taxes, using the proceeds to finance health insurance for all and universal access to college — all paid for by the government.

Listen to his opponent, Hillary Clinton, and Sanders is just another politician serving up mathematically unsound happy talk in search of votes. “If the numbers don’t add up,” she recently told a Houston audience, “it’s wrong to make those promises.”

But do the numbers add up?

On this question, economists predictably disagree. At the center of the debate lie differences over basic assumptions about the workings of economic life: What happens when you raise taxes on investments traded by the most affluent American households? Does this discourage economic growth, thus shrinking government revenues? Or does it simply even out the spoils?

And what happens when the government starts paying all Americans’ doctor bills? Will people use a lot more healthcare, increasing the costs? Or will this usher in efficiencies that will shrink the overall healthcare bill, yielding savings that can be plowed into a dramatic expansion of Medicare, the government-run health insurance program?

Whether Sanders’ promises are just campaign fodder or a credible plan to deliver real programs ultimately hinges on how one assumes these questions are answered.

For Senator Sanders and former Secretary of State Clinton, here is the divide that most neatly encapsulates their differences. “I’m not just making speeches and not just promising free this and free that and free everything,” Clinton said just days before Nevada voters handed her a victory in the state’s Democratic caucuses last week, adding to her growing momentum toward the nomination.

Economists may criticize Sanders’ plans or support them, yet virtually everyone seems to agree the Vermont lawmaker is proposing the greatest expansion of the public sector since the New Deal.

Sanders does not hide from characterizations he is promising an enormous reordering of American economic life: He drapes himself in such talk as the central virtue of his campaign. A self-described Democratic socialist, he praises the generous — and expensive — social welfare programs run in countries such as Sweden and Denmark.

Polls show his promises for government-financed healthcare and college are wildly popular among Democratic voters even as they have been labeled unrealistic, not just by Republicans but by some icons of the Democratic Party establishment.

“Bernie Sanders’ plans are dead on arrival with Democrats in Congress,” Barack Obama campaign strategist David Plouffe told Yahoo last week.

Government today represents about a third of the total U.S. gross domestic product. That figure would skyrocket if Sanders’ agenda was realized — a worthy aspiration in the eyes of his fans, a sign of political naïveté to his Democratic opponents, and a vision of federal power run amok in the portrayals of Republicans.

Yet the debate over Sanders’ promises is really just an arithmetic problem: Would the raft of new taxes Sanders proposes generate the revenue he says they will, and would those revenues be enough to finance his vision?

Austan Goolsbee, a former Obama economic adviser who now consults for hedge funds, says the only way to find the revenue to fund Sanders’ plans would be to jack up government spending as a share of GDP to unprecedented heights — at least in America.

“An increase in spending of the amount Sanders proposes would put us at 47.5 percent,” he said. “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.”

Sanders plans for universal health insurance are premised on the incontrovertible fact the United States spends a great deal more on medical care than any other country without yielding better healthcare results. According to data from the Organization for Economic Cooperation and Development (OECD), as a share of GDP, the United States pays out almost double what the average OECD nation devotes to healthcare. “Despite spending more on healthcare, Americans had poor health outcomes, including shorter life expectancy and greater prevalence of chronic conditions,” according to a recent report by the Commonwealth Fund, which studies health policy.

“It’s not hard to understand why countries that provide health insurance on a universal basis and which have, for instance, public boards that negotiate drug prices are able to deliver pretty good healthcare for half to two-thirds of what the U.S. spends on it,” said James Galbraith, an economics professor at the University of Texas who served as the executive director of Congress’ Joint Economic Committee and who supports Sanders’ economic plans. “We spend so much because we basically allow private sector actors to extract very large revenues from the [healthcare] sector.”

Sanders’ proposal is aimed squarely at eliminating one of those private entities: insurance companies. His initiative is designed to replace insurers with a Medicare-style health system for all Americans. Some 134 economists and healthcare experts have signed a letter saying his “plan will do more and cost less than any privately administered health insurance system.”

Sanders proposes to maintain current spending on existing public healthcare programs and then replace the billions spent on private insurance and out-of-pocket expenses with a plan that would require the government to come up with about $14 trillion of new revenue in the next decade.

To generate that nearly $1.4 trillion a year, he has proposed substantial tax increases on wealthy Americans and the elimination of a tax perk for people who buy their insurance through their employer.

Specifically, Sanders says he would generate needed revenues like this:

• A 6.2 percent payroll tax and a 2.2 percent income surtax. The former would hit all wages, the latter would fall only on households whose annual income is above the amount exempted by standard deductions — about $28,800 for a family of four. These levies, his campaign says, would generate about $840 billion a year in new revenue.
• Tax increases aimed at high-income earners: Sanders proposes creating four new tax brackets for income above $250,000, including raising the top tax rate on income above $10 million from 39 percent to 52 percent. In addition, for those earning more than $250,000 a year, he also proposes to tax capital gains and dividend income at the same rate as regular income. Most of that investment-related income is made by the wealthy. His campaign says those reforms would collectively raise more than $200 billion a year.
• Eliminate subsidies for private insurance: With employer-based health plans a thing of the past under Sanders’ proposal, there would no longer be the expensive deductions that exempt spending on private insurance from federal taxes. Getting rid of those deductions, says Sanders, would save $310 billion a year.

Does that arithmetic add up? Since the release of the Democratic candidate’s plan, three respected Washington groups have arrived at different conclusions about whether it would raise the money it says it would.

The left-leaning Citizens for Tax Justice issued a report finding the revenue estimates were sound, and overall, most employers would end up paying far less in new healthcare taxes for most employees than they currently pay in healthcare premiums for those workers. The analysis further concluded if those savings end up being passed on to employees, “The plan would raise average after-tax incomes for all but the top income groups.”

Like CTJ, concurrent reports by the more conservative Committee for a Responsible Federal Budget and Tax Foundation confirm Sanders’ estimate of big savings from the end of the healthcare tax expenditure. However, these two groups questioned some unstated assumptions baked into other parts of Sanders’ tax proposals.

For example, CFRB asserts taxing capital gains like all other forms of income will not generate any new revenues at all because, the group argues, such a rate will reduce economic growth and prompt investors to “choose to ‘realize’ fewer gains by selling assets.”

CTJ and the Tax Foundation, however, dispute that, saying while there would be some such slowing effect, the change would still generate tens of billions of dollars of new revenue.

The Tax Foundation’s criticism revolves primarily around the economic effects of Sanders’ plan: The group argues by raising tax rates, Sanders would slow economic growth, which would then reduce the projected revenues gleaned from his new levies by nearly 28 percent, leaving a shortfall.

“If you put in place a tax proposal that causes people to work less and invest less, as we think the Bernie Sanders tax proposal would, that means you should also account for the decreased revenue when fewer people are working and fewer investments are being made,” the Tax Foundation’s Matt Greenberg told International Business Times.

CTJ’s Matt Gardner, though, said the Tax Foundation’s projections assume “taxes have a negative economic impact, but government spending has absolutely no positive economic impact” — and Sanders is proposing an unprecedented infusion of public spending. The Tax Foundation acknowledged that its estimates do not factor in the potential stimulative effects of that new government spending.

“More People Using ... More Healthcare”

Even if Sanders’ tax plans generate the revenues he says they will, there remains a vigorous debate over whether nearly $14 trillion would be enough to bring every American into a Medicare-style system.

University of Massachusetts-Amherst’s Gerald Friedman says it would. The economist — who has said he is backing Hillary Clinton for president — issued a memo noting the federal government expects Americans to spend $15 trillion on healthcare through private insurers, and $5 trillion more on out-of-pocket costs for such insurance, including co-pays, premiums and deductibles. He points out that in the United States, administrative costs associated with healthcare are far higher than countries with a single-payer system (by one estimate, almost 31 percent of America’s healthcare spending is on administrative expenses such as insurance industry salaries and personnel who manage myriad private billing systems).

Consequently, Friedman estimates a Medicare-for-all system’s simplified billing system, its elimination of payments that subsidize insurance profits and its ability to use market power to negotiate lower prescription drug prices would together reduce health spending by $6 trillion in the coming decade. The $14 trillion from Sanders’ tax initiatives would cover the difference.

“If the U.S. moved to a single-payer system as efficient as Canada’s, we’d save $430 billion on useless paperwork and insurance companies’ outrageous profits, more than enough to cover the 31 million Americans who remain uninsured, and to eliminate co-payments and deductibles for everyone,” City University of New York health experts David Himmelstein and Steffie Woolhander wrote in a recent article evaluating Sanders' proposal (both Woolhander and Himmelstein have said they support Sanders’ healthcare proposal).

To make his point, Friedman cited a 2005 study by former President Bill Clinton administration health official Kenneth Thorpe, which found a single-payer system’s savings on administrative expenses could shave as much as 20 percent off the amount America spends on private insurance.

But even with such savings, Thorpe said, Sanders is overestimating the total administrative savings realistically possible. Thorpe further argues that in eliminating all out-of-pocket medical expenses, Sanders’ proposal would remove major financial disincentives for consumers to seek healthcare services, thereby prompting far more health spending than the senator’s current estimate assumes.

“On average, people with private insurance end up paying about 20 percent of their healthcare bill through deductibles and coinsurance,” said Thorpe, who is now a professor of public health at Emory University. “So when you eliminate that and go to 100 percent coverage, you are going to have a whole lot more people using a whole lot more healthcare services, which will generate a whole lot more healthcare spending.”

Proponents of Sanders’ plan cite data from Canada and Taiwan showing that when those nations moved to full-coverage single-payer systems, they did not see the kind of spikes in healthcare utilization that Thorpe projects.

Thorpe, though, said he based his analysis on 2013 data from the Department of Health and Human Services. He also asserts Sanders is wrong to assume state governments would continue their current spending levels on programs like Medicaid and the Children’s Health Insurance Program. In all, he estimates Sanders’ plan actually would require twice the amount of new revenue the Vermont lawmaker assumes.

“To finance it adequately would require dramatically higher taxes than Sanders has provided for — equal to about 20 percent of workers’ compensation,” said Thorpe, who consulted with Vermont officials on that state’s since-aborted single-payer healthcare initiative. “Many more people would consequently end up losers under his proposal.”

College Degree the Equivalent of a High-School Degree

While not requiring as much money as his healthcare initiative, Sanders’ proposal to make college tuition free would still require a hefty investment: by his estimates, $75 billion a year.

During the campaign, Sanders has said such an expenditure is a necessity in the 21st century. He equates the idea of a free college education with free K-12 education, saying America must resurrect the idea — which previously had been adopted by some states and cities — to compete in the global economy.

“In 2016, in many respects, a college degree is the equivalent of what a high-school degree was 50 or 60 years ago, in terms of going out and getting a good job,” he said at a college rally in Massachusetts earlier this month.

Sanders $75 billion cost estimate is backed up by the most recent federal data, which show public universities receive about $70 billion a year from tuition and fees — only a little more than the federal government spends annually on higher education grants and tax exemptions, data compiled by the New America Foundation show.

Last year, Sanders introduced legislation — still pending in Congress — to eliminate tuition at four-year public colleges and universities by having the federal government cover two-thirds of that cost, and states cover the other third. His campaign proposal, which is based on that legislation, aims to pay the federal share through a tax on financial transactions involving stocks, bonds and derivatives. That tax exists in 40 countries and collectively generates about $38 billion annually for those nations, according to an estimate by Columbia University’s Stephany Griffith-Jones and the London Business School’s Avinash Persaud.

Sanders says such a levy in the United States — which has the largest financial sector in the world and the biggest stock exchanges — would raise as much as $300 billion a year, far more than needed to finance his college plan. As proof, his campaign points to a 2012 report by University of Massachusetts-Amherst economists who say financial transaction taxes of 0.5 percent on stock trades, 0.15 percent on bond trades, and 0.05 percent on derivatives trades would raise $352 billion a year, even with an attendant reduction in trades the tax would encourage. Separate analyses by the left-leaning Center for American Progress , the nonpartisan Congressional Budget Office and the centrist Tax Policy Center found that depending on particular financial transaction tax rates, the levy could end up raising $20 billion to $75 billion a year.

The Tax Policy Center report said a financial transactions tax “would be quite progressive” — however, it disputes Sanders’ view the levy could raise the kind of money he says it would. The group’s report says the tax comes with diminishing returns because the higher it goes, the more it discourages financial transactions, consequently reducing the amount of public revenue generated.

But while Tax Policy Center researchers disagree that the tax can raise $300 billion a year, they do conclude that a “well-designed” financial transactions tax could raise $75 billion a year starting in 2017, enough to cover Sanders’ college initiative, at least for the near-term.

The long-term, though, could be a different story. College costs have steadily risen, and simply subsidizing higher education would not halt that rise, says Andrew Kelly of the conservative American Enterprise Institute.

“If the past is any guide, that cost will continue to grow, and an influx of federal money may lead profligate administrators to spend even more,” he wrote in a recent opinion piece published in the New York Times. “Enrollments will also increase, further multiplying the cost of free college.”

Sanders has brushed off that criticism, insisting that with America’s vast wealth, the country can afford his agenda.

“What this campaign is about is thinking big, not small,” he has said. “When we stand together, there is nothing that we cannot accomplish.”