March 29, 2016
I’m tied up with many other things, but since folks asked, I will give a quick comment/explanation of the Vox analysis of Bernie Sanders’ tax plans. For those who haven’t seen it, Vox put together a calculator that allows people to plug in their income and then see how their tax bill would change under the tax plans proposed by Donald Trump, Ted Cruz, Hillary Clinton, and Bernie Sanders. For the first two, most people get tax cuts. There is little change with Clinton, but big tax increases with Sanders.
For example, I took a single person with one kid, who earns $30,000 a year. According to the tax calculator, this person would see an increase in their tax bill of $3,680 as a result of the Sanders’ tax package. I can’t quite follow the math here, because the calculator says that Sanders plan gives this a person a tax rate of 18.1 percent, compared with 10.3 percent for the current system. This implies an increase in the tax rate of 7.8 percentage points of this person’s income. But 7.8 percentage points of $30,000 would get you $2,340 not the $3,680 indicated by the calculator.
Okay, but let’s ignore the math problem and get to the underlying issues. Most of the basis for this tax increase for moderate income workers is Sanders’ tax to pay for his universal Medicare plan. This would impose a payroll tax on employers of 6.2 percent and a 2.2 tax on individuals for income in excess of the standard deduction (roughly $9,500 for this person). There is also a 0.2 percentage point tax increase to cover the cost of paid family leave. In addition, some of the other taxes will have feedback that will affect moderate income earners, but these taxes are the bulk of the story.
So let’s focus on the roughly 8.0 percentage point increase in taxes associated with the health care plan. Most of this is money paid by the employer. Vox is not wrong to count it, since the conventional view among economists (which I share) is that this is effectively money out of workers’ pockets. In other words, if the government were not taxing the money away, employers would be paying it to workers.
But the flip side of this coin is that if we count the employer paid tax as implicitly a tax on workers, then we also have to count it as part of their income. This matters a little bit with this calculation, since our worker with a $30,000 income would actually have an income of $32,295 in Voxland, since the employer is paying a total of 7.65 percent ($2,295) in Social Security and Medicare payroll taxes for this worker.
However this is the less important part of the story. Suppose that this worker currently has employer provided health care insurance, as most workers still do. That costs the employer roughly $6,000 a year on average. In this case the worker’s Voxland pay is $38,295.
Now tax man Sanders comes along. Again, I don’t fully understand the dollar calculation of Vox’s tax increase, but let’s just use the $3,680 increase in the tax bill it attributes to this person under the Sanders’ plan. While their tax bill does rise by this amount, their before tax income will rise by $6,000 since the employer is no longer paying for the workers’ health care premium. Under standard economic assumptions, this $6,000 would end up in the workers’ paychecks. (No, this doesn’t necessarily happen immediately, nor with all workers. Of course the rise in an employer side payroll tax also doesn’t necessarily come immediately of out everyone’s paychecks either.)
Anyhow, so the net in Voxland is that this person has $2,320 more in their paycheck every year under the Bernie Sanders’ tax plan than under the current system. It reports this as a higher tax rate because more money is being paid to the government, but they nonetheless have more after-tax income because they are paying less money to the insurance industry (i.e. an insurance industry tax).
There are plenty of reasonable questions about whether the Sanders health care plan will work as promised, but folks should be clear, if it does, it means they will generally have much more money in their pockets. (I didn’t even account for savings on out of pocket health care expenses under the Sanders plan.)
So if all folks care about is how much money they pay to the government in taxes, then the Vox calculator is a useful tool. However if they are interested in how much money they will have in their pockets under the different candidates’ proposals, they will need to do a deeper analysis. (In fairness, Vox does make a point of noting the additional services provided under Sanders and the reduction in services under the Republicans, but that disclaimer may be lost on many people playing with the calculator.)
Note: I discovered the source of the basis of the $3,680 increase in the tax burden calculated for this worker with a $30,000 annual wage. The Tax Policy Center’s calculator quite reasonably imputes employer-provided health care benefits to this worker. These benefits are not subject to either payroll tax or income tax. However, as a result of Sanders’ health care plan, employers will no longer being paying the benefits to insurance companies, they will instead pay them to workers as wages. This leads to an increase in taxable wages, which therefore leads to a higher tax burden.
So the $3,680 number makes sense in this context, although I suspect most calculator users will not realize that it is associated with a higher after-tax wage.
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