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Reviewing Elizabeth Warren’s Tax Proposals to Fund Medicare for All

5 min readBy: Erica York, Garrett Watson

Today, Democratic presidential candidate Sen. Elizabeth Warren (D-MA) released her Medicare for All plan, which includes several new sources of revenue to fund $20.5 trillion in additional government spending on health care between 2020 and 2029. Her revenue proposals fall under four categories: contributions to directly finance Medicare for All, business taxes, individual taxes, and other reforms.

Sen. Warren’s proposal begins by using a $34 trillion, 10-year cost estimate for Medicare for All published by the Urban Institute. She adjusts this estimate downward by factoring in reduced insurer administrative costs, changes to health-care payments, reducing the growth of medical costs, reducing prescription drug costs, and redirecting $6 trillion in existing state and local government health-care spending.

Sen. Warren estimates these policy choices will save about $13 trillion over 10 years, leading to a $20.5 trillion funding gap to be covered by new taxes. She proposes the following taxes to cover this shortfall, with the goal of not increasing taxes on middle-class taxpayers:

Medicare for All Financing

Employer Medicare Contribution

American companies with 50 or more employees would, instead of making premium payments to private insurers, be required to pay a contribution to the federal government. Employers would calculate their contribution by averaging health-care costs per employee over the last three years, multiplying that average by their total number of employees, and paying 98 percent of the total to the government. Estimated to raise $8.8 trillion from 2020-2029.

Supplemental Employer Medicare Contribution

“Large firms with extremely high executive compensation and stock buyback rates” would be required to make additional contributions if the Employer Medicare Contribution does not meet the $8.8 trillion revenue target.

Additional Revenue

The $3.7 trillion that American workers are projected to spend on insurance premiums from 2020 to 2029 would instead be received as wages subject to existing taxes. Health savings accounts, medical savings accounts, and the deductions for medical expenses would be eliminated. Estimated to raise $1.4 trillion from 2020-2029.

Business Taxes

Cost RecoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages.

Under current tax law, firms may accelerate cost recovery for their investments by fully deducting the cost of investments from taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. in the year that they are incurred, for most types of investment. Warren’s proposal would eliminate the acceleration of depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. and amortization, requiring firms to deduct the cost of investment over the life of the acquired assets. Estimated to raise $1.25 trillion from 2020-2029.

Systemic Risk Fee

Financial institutions with more than $50 billion in total assets would be required to pay a fee equal to 0.15 percent of their covered liabilities. Estimated to raise $100 billion from 2020-2029.

Country-by-Country Minimum TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Strengthen the current anti-base erosion and minimum tax regime established by the Tax Cuts and Jobs Act (TCJA) by establishing a 35 percent country-by-country tax on foreign earnings. This means that firms would be required to remit the difference between the tax rate paid to foreign countries on foreign earnings and 35 percent to the United States. For example, a firm paying a 30 percent effective tax rate on foreign earnings must pay a 5 percent tax rate to the United States. The U.S. would also collect taxes from foreign firms based on the fraction of their sales made domestically based on a 35 percent minimum tax rate. Both are estimated to raise $1.65 trillion from 2020-2029.

This is in addition to Sen. Warren’s earlier proposals to repeal the Tax Cuts and Jobs Act and Enact “Real Corporate Profits Tax,” which would raise the corporate tax rate to 35 percent and enact a surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on U.S. corporations equal to 7 percent of the worldwide profits reported on a corporation’s financial statement.

Individual Taxes

Wealth TaxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary.

Impose an additional 3 percent wealth tax on taxpayer net wealth above $1 billion, bringing Sen. Warren’s proposed wealth tax up to 2 percent on net wealth above $50 million and 6 percent on net wealth above $1 billion. Assuming a 15 percent avoidance rate, she estimated this will raise an additional $1 trillion from 2020-2029.

Mark-to-Market Taxation of Capital Gains Income

Eliminate the preferential tax rates on long-term capital gains and qualified dividends for the top 1 percent of households and apply ordinary income tax rates. Implement a “mark-to-market” tax system on capital gains for the top 1 percent of households, where capital gains income (excluding retirement accounts) would be taxed annually instead of only when an asset is sold or transferred. Both are estimated to raise about $2 trillion from 2020-2029.

Other Reforms

Financial Transactions Tax

Impose a tax on the purchase of most stocks, bonds, and other debt obligations of 0.1 percent of its value and on the purchase of derivatives of 0.1 percent of all payments made under the terms of the derivative contract. Estimated to raise $800 billion from 2020-2029.

Improved Enforcement

Improved Enforcement — Increase funding for the Internal Revenue Service (IRS) and expand, strengthen, and increase various reporting requirements with the goal of reducing the overall tax gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. (the gap between the amount of taxes owed and collected) by one-third. Estimated to raise $2.3 trillion from 2020 to 2029.

Immigration Reform

Immigration Reform — Supports a pathway to citizenship as well as expanded legal immigration. Estimated to raise an additional $400 billion from 2020 to 2029.

Reduction in Defense Spending

Reduction in Defense Spending — Eliminate the Overseas Contingency Operations Fund. Estimated to save approximately $800 billion between 2020 and 2029.

Taken together, these proposed tax changes would raise marginal and effective tax rates on high-earning and high-net-wealth taxpayers, increase the cost of capital, and reduce the competitiveness of the U.S. tax code. The proposals may also indirectly impact middle-class workers through tax incidenceTax incidence is a measure of who ultimately pays a tax, either directly or through the tax burden. This burden can be split between buyers and consumers, or different groups in the economy. . For example, firms may respond to the repeal of full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. and the increase in the corporate tax rate by making fewer investments, lowering long-run incomes.

Policymakers should consider the economic impact of these tax proposals in addition to how the proposals shift the distribution of costs associated with medical care, potentially leaving the U.S. with lower long-run economic growth and a less internationally competitive tax code.