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Robin Hood taxes

By Nina Godbold
web posted November 27, 2017

Who wouldn’t want cheap healthcare? Especially Bernie Sanders’ cheap, universal healthcare? After all, it doesn’t sink the country into more debt, offers an alluring, Robin Hood-esque idea of taxing the rich to help the poor, and reveals a vision of a country where no one will struggle with health-care bills, where we’ll all be happy and healthy in the land of opportunity. Unfortunately, the logistics of this plan aren’t quite as well-considered as they seem. Sanders’ plan to provide universal healthcare is often faulty in its reasoning, ignoring both the consequences of paying for the plan and the results of the plan itself.

One of the largest element of Sanders’ tax plan involves robbing the rich to feed the poor...or more accurately, taxing the rich to pay for the healthcare of the poor. Sanders planned to institute even higher income tax rates for those whose incomes meet or exceed $250,000 per year, as well as limiting tax deductions for the rich to provide revenue for his healthcare plan. Unfortunately, this strategy would result in several issues. First, increasing taxes for those in a higher income bracket will result in less production and therefore less consumption among those people, which will reduce GDP in some measure, since the rich will have less of an incentive to make more money. After all, if you lose half of what you make in an hour, rather than a third, leisure becomes cheaper, and therefore a more appealing option. More leisure means less production, which in turn tends to mean less consumption, reducing GDP when applied on a larger scale. Limiting tax deductions will create a similar result, since fewer tax deductions means more taxable income. More taxable income creates  an incentive to reduce one’s income ( especially if you are on the low end of a certain bracket) so as not to lose so much money. This reduces consumption, as mentioned above. In addition, charitable contributions enable the firms donated to to consume more. For instance, money that might normally go in a savings account (not entering into GDP) would then end up in the consumption component of GDP as a firm spends it. In this way, Sanders’ plan to reduce the ability of the rich to earn tax deductions would result in less consumption and therefore a lower GDP.

In addition, Sanders planned to tax capital gains, which refers to profit resulting from the sale of a capital asset, such as a stock, bond, or real estate, at the same rate as income from work. While most capital gains are from financial investment, which does not directly impact GDP, some capital gains come from real estate. Real estate can be a form of fixed investment, and thus a tax on its sale would result in less incentive to sell it, thereby decreasing GDP. Furthermore, taxing capital gains from financial investment will result in less financial investment, which will indirectly result in less fixed investment. Companies typically sell stocks and bonds in order to raise money to increase their fixed investment. Therefore, a decrease in financial investment will impact a firm’s ability to raise money for fixed investment without taking out a loan. If a company has to take out an interest-bearing loan rather than raise money through selling stocks, they will typically reduce their fixed investment. This in turn will decrease GDP, since a decrease in fixed investment will reduce the investment component of GDP.

Finally, Sanders failed to consider the result of giving people cheaper healthcare. If people pay less, they will demand more. As shown in the graph, healthcare customers with no health-care are willing to pay twenty dollars a visit, and hospitals and doctors will supply a total of thirty billion visits a year, as indicated by E1. Now, if health insurance companies offer to pay anything over twenty dollars, up to fifty dollars a visit, hospitals and doctors will supply a total quantity of 60 visits per year, and quantity demanded of health servicesincreases to take advantage of those healthcare services. Now, let’s assume Sanders lowered the price for a healthcare visit for everyone by offering universal healthcare at lower costs, taking the cost of a health visit down to ten dollars and stating that the government would pay everything else. At ten dollars, health customers will demand a total of 65 billion visits a year, while health services require a price of sixty dollars to supply that amount. Thus, customers will pay $10, while the government will pay $50. That means that health costs will increase beyond that of costs under previous insurance. Lower costs increase quantity demanded, and so Sanders’ plan to fund healthcare will need more money than he anticipates, resulting in, most likely, higher taxes in another area of life.

Sanders’ plan for cheap, universal healthcare, paid for by playing Robin Hood, is riddled with problems. Setting aside the fact that increasing the taxes is sure to be unpopular with those affected, higher taxes reduce consumption by decreasing the reward of working and thus production. In addition, reducing the amount of tax deductions one can receive through charitable giving will decrease donations to firms, thereby decreasing the consumption of those firms, further decreasing GDP. Taxing gains from financial investment will result in less financial investment, which in turn will decrease the fixed investment and expansion of the companies looking for investors to pay for their fixed investments, which in turn will decrease GDP. Finally, Sanders’ plan to make healthcare cheaper will increase demand for it, thereby increasing the price the government must pay to cover healthcare. The gleaming vision Sanders offered last election season was a pretty, appealing package masking an ill-considered plan to mimic ever-so-glamorous Europe and offer universal healthcare. ESR

This is Nina Godbold’s first contribution to Enter Stage Right. © Nina Godbold

 

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