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Warren’s Hidden, Destructive Tax Proposal: The Head Tax

December 3, 2019
Warren’s Hidden, Destructive Tax Proposal: The Head Tax
WASHINGTON, DC - NOVEMBER 01: Sen. Elizabeth Warren (D-MA) addresses a rally against the Republican tax plan outside the U.S. Capitol November 1, 2017 in Washington, DC. The rally was organized by Patriotic Millionaires, left-wing group of weathy people who support political representation for all citizens and believe that the rich should shoulder a greater burden of taxes. (Photo by Chip Somodevilla/Getty Images)

After weeks of pressure to explain how she would fund her Medicare for All plan without raising taxes on the middle class, presidential candidate Senator Elizabeth Warren (D-MA) recently relented. Kind of. The presidential candidate unveiled a set of tax hikes that still produce only about half of the $34 trillion needed to fund her healthcare proposals. Yet, despite her attempts to focus on favorite tax targets—corporations and the wealthy—many of these proposed taxes would in fact harm the middle-class. Perhaps the worst of the tax hikes is her proposal for a type of employee “head tax.” 

Making up just over half of the $17 trillion in tax increases under Warren’s plan to fund Medicare for All is an “Employer Medicare Contribution.” This would require businesses with 50 or more employees to calculate their average per-employee spending on health insurance coverage “over the last few years,” adjust for inflation, multiply that by their number of employees, then send 98 percent of that number to Uncle Sam as their Employer Medicare Contribution.

But despite the “contribution” window-dressing, this is essentially an employee head tax. Such taxes are an especially damaging type of tax because they assess a flat fee per employee. As any economist can tell you, taxing something gets you less of it—and employee head taxes are a tax on jobs.

Though employers are the ones that file the taxes, employees—particularly lower-wage employees—are the ones that would be harmed by Warren’s proposal. Because each employee increases the employer’s total Employer Medicare Contribution by the same, flat amount, lower-wage employees become comparatively more expensive to hire.

For example, a company with a $5,000 average Employer Medicare Contribution is going to represent a drastically larger share of total compensation (which includes salary and the value of benefits like health coverage or 401(k) matches) for a mid-level employee making $50,000 annually than it would for a senior-level executive with a yearly salary of $500,000. By converting these health costs into a formula for per-employee tax payments, Warren proposes effectively enshrining into federal law a regressive feature of employment benefits.

It is for this reason most entitlement programs are currently funded by payroll taxes, which are assessed at a flat rate (and for Social Security, only charged on the first $132,900 in income). This type of system, while not perfect, helps somewhat to mitigate regressivity.

Warren’s proposal, if enacted, would make other middle- and working-class employees more expensive as well. Part-time employees, who generally do not receive employee health insurance, would nonetheless trigger Employer Medicare Contribution liability for the employer (prorated based on the number of hours worked). Those employees would suddenly become far more expensive to retain, as would employees who currently decline their employer-offered health insurance, such as under 26-year-olds on their parents’ health plan, or employees using their spouse’s coverage.

Another quirk of Warren’s plan is that it would punish employers that currently offer more generous health insurance benefits. Because employers would calculate their Employer Medicare Contribution based on the amount they currently spend on employees’ health insurance, employers that are more generous, think of largely union auto manufacturers, would end up with a higher tax liability for their Employer Medicare Contribution. At the same time, they would lose any competitive advantage they are currently gaining from offering prospective hires more generous health insurance programs, as all employees would receive the same Medicare coverage. Businesses that offer generous benefit packages may also attempt to mitigate this effect by slashing benefits in the years leading up to the implementation of Warren’s plan. 

Another unintended consequence of Warren’s proposal is that it would likely put downward pressure on American innovation and entrepreneurship. Her exemption for businesses under 50 employees can be a double-edged sword—on the one hand, it would protect small businesses from having to pay a large Employer Medicare Contribution tax too early in their life cycles, but on the other, it would provide a large incentive to stay below 50 employees, lest they take on a substantial tax burden. That could have the effect of reducing competition and encouraging more risk-averse behavior from potentially market-shifting small businesses. We’ve seen this effect before—the Affordable Care Act included a similar provision which studies have found has led to a spike in “49er” businesses that aim to stay just below the 50-employee threshold. 

In total, Warren’s proposed Employer Medicare Contribution pay-for would have the effect of punishing all the groups she probably does not want to punish—lower-wage, part-time, and young employees, employees of heavily-unionized employers that currently offer generous health insurance benefits, and even small businesses. On the campaign trail, Senator Warren fashions herself a policy wonk who “has a plan” for pretty much everything. This plan, however, severely misses the mark.

Andrew Wilford

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.