Peter Morici: What Warren gets right — and wrong — about health care

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Elizabeth Warren addresses a crowd in Florence, S.C.

Sen. Elizabeth Warren, as president, promises to be the most aggressive reformer since Franklin Roosevelt and a fiscal magician too.

Armed with a wealth tax and higher corporate and personal income taxes, she promises to finance $800 billion in additional aid for K-12 education, $1.25 trillion for free college tuition and student debt relief, and a Bernie Sanders-style Medicare-for-All system.

Liberal and conservative analysts estimate Bernie Care would require about $3 trillion a year in new federal taxes.

Employers and individuals are already shelling out that much on the present system. Unfortunately, it is not possible to devise taxes equally on businesses that currently provide benefits and those that do not—and individuals who currently pay a lot and those who pay much less—without making some companies and working families a lot worse off.

Financial sleight of hand

In an Houdini escape, Warren promises to finance her program by only taxing the wealthy and overhauling the health-care system to slice $3 trillion to about $1.1 trillion—a figure that should be taken with a lot of salt.

According to her website, a wealth tax could generate about $275 billion a year but that estimate does not account for the usual tax avoidance. Experience teaches that capital and big incomes have quick feet. Based on experience with raising income-tax rates, an aggressive tax should reduce reportable wealth by about 60%—being generous, though, let’s give the senator $135 billion in new revenue.

The top 1% — those earning more than about $550,000 a year — should pay an estimated $1.2 trillion in federal taxes in 2020. If we double their rates, allowing for tax avoidance, the most we can expect is about $500 billion.

Finally, doubling corporate-tax rates — which at current rates is projected to yield about $250 billion in 2020 — would encourage lots of inversions.

That’s fancy tax lawyer talk for moving your place of incorporation and a few filing cabinets from Delaware to Ireland. In a high tech, increasingly service-oriented economy, where big bulky assets like factories are less likely to be domiciled in the United States, that becomes easier with every passing year. The most the senator could expect from higher corporate rates is another $125 billion.

$760 billion is not enough

Summing it up for her Ivy Tower advisers—$760 billion will not pay for Bernie Care. If she tries to raise taxes on working- and middle-class folks to make up the difference, the senator is likely to end up like George H.W. Bush—a one-term president.

The senator is too smart for that.

When the Congressional Budget Office sends those numbers to the Oval Office, we can expect the new administration to scurry for other ways to keep her health-care promises but she is up against some hard realities.

Many Americans with good private insurance want to keep it, and Americans pay nearly twice as much for health care as folks in other industrialized economies.

The latter don’t have the legacy of Washington encouraging — most recently through the Affordable Care Act — pricing monopolies in local hospital and medical-specialty markets.

And enabling the avarice of pharmaceutical companies by prohibiting Medicare from negotiating drug prices — manufacturers and pharmacy-benefit managers can set those as high as they like, Medicare has to pay, and those prices set benchmarks for the broader drug market.

The solution

Give Americans choices but with reforms.

Empower the states to administer block grants for virtually all federal spending in their jurisdictions. They can use these funds to both establish a single-payer public option and continue subsidizing private insurance through the ACA exchanges. The former could look like the British system, where the state employs the doctors and run hospitals, or the German system where the latter remain largely in the private sector but are reimbursed. Let states experiment.

Families could choose a single-payer option, and employers currently providing benefits could be required to contribute what they now spend on private insurance for those employees selecting that public option.

Also, empower state attorneys general to bring aggressive antitrust suits through the federal courts against local pricing cartels established by hospitals and insurance companies, physicians group practices and price gouging by pharmaceutical companies and medical-device manufacturers when they charge more than prevailing prices in other high-income markets like Germany and the Netherlands.

Let the states, public plans and private insurers compete to demonstrate what approaches work best.