Democratic candidate Bernie Sanders recently released his health-care plan: a government-run single-payer system for the U.S., similar to what many European countries have. Criticism of the plan has so far focused on its lack of political feasibility, but there is an even more important reason to be wary: Accounting for costs and tax increases, it would reduce labor supply by 11.6 million. In a struggling economy, with tepid wage growth, hurting employment should be the last thing on any politician’s agenda.
The plan truly promises everything under the sun. Not only will everyone be able to get any medical treatment needed — with no cost at the point of service — but the plan won’t require a terribly high tax increase. The funding mechanism boils down to an increase in payroll taxes: an “income-based premium” of 2.2 percent for individuals and a tax of 6.2 percent on employers. Because economists, as well as the non-partisan Congressional Budget Office and the Joint Committee on Taxation, recognize that the "employer share" of payroll taxes is mostly borne by workers in the form of lower wages, this translates to an 8.4 percentage point increase overall.
These elements of the plan were the first to draw criticism. Not only do most single-payer countries fund their health-care systems with higher taxes on the middle class, but they also typically exclude a variety of services and drugs from coverage. Without being able to say no to some expensive drugs and services, the government would have a tough time driving down prices.
But perhaps the most stinging rebuke came from veteran health economist Kenneth Thorpe of Emory University. In Thorpe’s estimation, Sanders’ plan would require a total tax hike of 20 percentage points, and would cost $1.1 trillion more each year than the campaign has estimated. This is at least partly because the government would have to pay more than Medicare’s low rates to keep doctors and hospitals in the system, and making health care free at the point of delivery would also increase use of health-care services.
These criticisms alone should make Sanders’ plan a nonstarter. But that’s not the end of the laundry list of problems with the proposal.
Few economists would dispute that tax rates can affect people’s decision to work. The higher a person’s marginal tax rate, the bigger the disincentive to work more; a 50 percent rate, for instance, means that earning another dollar nets only an extra 50 cents. This is what economists call the “substitution” effect.
But there is a countervailing effect as well. As you pay more in taxes, you may want to try to maintain your previous standard of living, and thus decide to work more. This is called the “income effect.”
The ultimate effect of taxes on the workforce depends on which of these forces is stronger. The CBO, for instance, has come to the conclusion that the Affordable Care Act’s combination of taxes, tax credits, and mandates will reduce full-time equivalent employment (one full-time equivalent employee works 40 hours per week; two part-time workers equal one full-time equivalent) by about 2 million in 2025.
As it turns out, the ACA’s many taxes are relatively insignificant compared with those in the Sanders plan. Applying the CBO’s approach and assumptions, along with tax data from the National Bureau of Economic Research, to the Sanders plan indicates that the campaign’s assumed taxes would reduce employment by 4.9 million full-time equivalent workers in 2025. Not an insignificant number.
When we take Thorpe’s more realistic assumptions and apply the same approach, the fully-implemented plan reduces employment by a whopping 11.6 million full-time equivalent workers. Under these assumptions, the average marginal tax rate would grow from around 22 percent to 42 percent, while the average total tax rate would increase from 11 percent to 31 percent. At the upper end of income, total tax rates would be far beyond 50 percent. And none of this factors in state and local taxes.
Of course, some of drop in employment might be considered “voluntary.” Some would stop working because they no longer needed to be employed to receive health insurance — escaping "job lock," as House Minority Leader Nancy Pelosi once put it. But others would simply find it meaningless to put in extra hours or look for more lucrative positions when so much of their earnings get sucked away as taxes.
For employers, this would all mean a large increase in hiring costs, too. Sure, as Sanders’ campaign likes to remind us, employers would no longer pay for private health insurance. But economists also recognize that health insurance is a form of compensation. And if you cut health insurance (with or without raising taxes), wages must in turn go up.
Sanders might be correct that health-care reform is unfinished. There remain many problems with the ACA that must be addressed and many problems that the ACA left untouched. But it’s quickly becoming apparent that the Sanders plan for American health care is the wrong way to fix these problems and offers a bad deal for workers.
Yevgeniy Feyman is a fellow and deputy director of health policy with the Manhattan Institute.