Warren’s M4A, Round 1

Just read this blast from Brother Matt, lambasting Warren’s M4A financing plan as “a disaster.” Wrong on several counts. Every count, actually.


Matt castigates Warren’s employer tax as a “Medicare head tax,” contrasting it unfavorably with a straight payroll tax. (The ‘head tax’ in this case is a firm-specific dollar amount based on prior health insurance costs; a payroll tax is simply a rate — a.k.a. ad valorem —  applied to taxable payroll). Matt glosses over the fact that the status quo is also a head tax, also known as employer-paid health insurance, in his sense.

Warren’s tax is less disruptive than a straight employer tax. It would be lower for firms that had cheaper insurance, because of healthier workforces and/or more narrow coverage. I don’t know how it would apply to firms with no coverage.

Matt’s comparison of the head tax with a non-existent payroll tax does not follow. In public finance jargon, a head tax is the same fixed charge applied to all persons. Warren’s tax varies with prior health insurance premium costs, which are generally assumed to be borne by the worker.

That exemption of smaller firms would encourage a wave of outsourcing and vertical disintegration may be doubted. There are already incentives for this, and we are stuck with what we have, at least for the time being. Currently, employer provision of coverage is voluntary, so if their costs are not much altered under Warren’s ‘head tax,’ there is less reason to fear some wave of spin-offs. Firms are a bundle of non-market transactions for reasons that supersede the purported efficiencies of fragmented, competitive sub-markets, as someone wrote in the 1930s.

Matt gives the game away by acknowledging he might start with Warren’s plan, horrible though it may be, but transition it towards a payroll tax. At first blush I would agree this end result is preferable to a nationally-uniform charge per worker.

There are going to be plenty of reasons to take exception to Warren’s proposal, but these aren’t very good ones.

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