What Warren is proposing here, in ordinary fiscal language, is a Medicare head tax. This is a departure from the normal Medicare payroll tax proposals. The distributive difference between them is that the Medicare payroll tax charges a specific percentage of each worker’s earnings, while the Medicare head tax charges a specific dollar amount per worker.
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Needless to say, the Medicare payroll tax is far superior to the Medicare head tax distributively speaking. Specifically, the Medicare head tax charges middle and low earners massively more than the Medicare payroll tax does.
Elizabeth Warren’s team realizes this. The reason they are using the head tax is because they think they can trick journalists into declaring that this is not a tax, since it is expressed in dollar terms rather than percent terms. On first glance, this might seem like a stretch that probably won’t work. But it is a more plausible strategy once you consider that journalists are mostly very stupid and cannot evaluate policy claims on their own, relying instead on trusted sources and names (Warren being one of those names).
Separate from the distributive problems of Warren’s head tax, the two exclusions also make the proposal clearly unworkable and easily gamed. All companies have to do to avoid rather large head tax charges is spin off workers into independent contractor status or spin them off into firms with less than fifty employees that they then contract with for services.
Once some employers start doing this, the average Medicare employer contribution will have to go up to keep revenue stable, which will push even more employers to restructure their labor into independent contracting or outsourcing to small firms. And, at that point, the death spiral is off to the races.
The genius of the payroll tax, of course, is that it is unable to be evaded like this. Every dollar of labor income — even independent contractor income — is charged the same. No restructuring can save you from it.
