A penalty vs. a tax
March 28, 2012 9 Comments
This whole Supreme Court mess (at least the individual mandate) portion could have been entirely avoided if the mandate simply functioned as a tax credit instead of a penalty. Basically, you raise everybody’s rates by some fixed amount and then give a tax credit/rebate of $XXX to everybody who purchases health insurance. Simple. And the constitutionality is beyond questions– we do this all the time for all sorts of things. Instead, by trying to avoid the necessary changes to the tax code, i.e., “raising taxes” (heaven forbid) or by claiming that you have to pay a “tax” rather than a “penalty” for failure to purchase insurance, this line of attack is left open. Functionally, of course, these matters are basically identical, as Ezra explains:
By now, you should know how the individual mandate works: Starting in 2016, those who don’t carry insurance will be assessed a $695 fine, per year, or 2.5 percent of their income, whichever is higher. There are exemptions for those who can’t afford health-care insurance, but that’s the basic gist of it.
Here’s how Paul Ryan’s health-care plan works: Individuals who purchase insurance will get a $2,300 tax credit. Individuals who don’t purchase insurance forgo the tax credit. There’s no affordability clause such that, say, someone who can’t afford health insurance nevertheless gets the tax credit.
If anything, Ryan’s plan might be a little harsher on those who choose to go without insurance. There’s no actual enforcement mechanism behind the individual mandate. The IRS can’t dock your pay or throw you in jail. If you choose not to pay it and you simply ignore the letters the government sends your way, nothing actually happens.
Conversely, under Ryan’s plan, if you don’t buy insurance, you really don’t get the tax credit, and so you do, in effect, pay a large tax penalty compared to a world in which you did buy insurance — larger, in fact, than the penalty under the individual mandate.
To an economist, there’s no difference between these two policies. Just to be sure, I asked William Gale, director of the Tax Policy Center, just to be sure. “It’s the same,” he shrugged. “The economics of saying you get a credit if you buy insurance and you don’t if you don’t are not different than the economics of saying you pay a penalty if you don’t buy insurance and you don’t if you do.”
Now, various conservative legal minds have argued that there is a profound difference between these two policies: One is penalizing a particular form of economic inactivity, while the other is encouraging a particular form economic activity. And perhaps that’s so. But it’s not a difference very many Americans would notice when it came time to pay their taxes.
Thus, even if the mandate were struck down, it’s actually a very simple policy fix. The problem is that due to the anti-tax jihadism of the Republican party, that simple policy fix is an untenable political fix.