A penalty vs. a tax

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.

About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

9 Responses to A penalty vs. a tax

  1. itchy says:

    “One is penalizing a particular form of economic inactivity, while the other is encouraging a particular form economic activity.”

    That’s not true. Ryan’s plan penalizes inactivity. The only difference is that the payment you make is hidden. One could argue that Ryan’s plan actually is more nefarious because it’s less up front about the consequences.

    Of course, the pre-Obamacare landscape is the least efficient. We all pay, no matter what.

  2. Alex says:

    Personally, I think the mandate is clearly constitutional. The Randy Barnett argument–the inactivity versus activity distinction–just doesn’t hold up to the rest of constitutional jurisprudence. And until now, Roberts and Alito seemed less interested than Rehnquist and O’Connor in rolling back the Court’s commerce clause cases. But sadly, it seems so far that the Court might be willing to make new law in this area.

    That said, I think the argument that I’ve seen from the left–that because the effect of the mandate is the same as the effect of a clearly constitutional tax, it has to be constitutional–is mistaken. (I know you didn’t expressly make this jump from “same effect” to “clearly constitutional” above, but it’s a jump Ezra seems to imply that a lot of people seem to make.)

    It’s wrong, I think, because, in the eyes of the law, optics matter. The reasons why a law is passed are as important as the effects of the law, under many constitutional provisions. And if we presume that it is unconstitutional to apply mandate economic inactivity or what have you, then the fact that you can effect the same result in a different way doesn’t really matter all that much.

    Here, Congress was clear that they were instituting a “penalty” that was intended to “mandate” the purchase of health insurance. They were very clear that this was NOT a tax, because politically speaking, a tax didn’t look good and perhaps was even untenable. Their intent is clear. We can’t just presume that Congress would or could have passed a constitutionally acceptable version just because the effect is the same.

    Now the problem is that healthcare and insurance are so unique and important, and the mandate so clearly implicates interstate commerce, that this activity/inactivity distinction makes no sense. It’s also very nebulous and unenforceable. This is a situation, I think, where you rely on the political sphere; the constitution does not and cannot protect against every bad policy decision, it just prescribes an outer bound that I think this policy does not reach beyond.

    Anyone who thinks that the distinction makes no sense intuitively understands why the tax/penalty distinction doesn’t matter — because it’s irrelevant to the underlying fact that the law is constitutional; they are the same as a policy matter. (The idea that reasoning matters just highlights, in other words, the ridiculousness of the underlying argument.)

    But if you believe that penalizing inactivity or what have you is beyond the pale of the constitution, then the distinction does matter, regardless of the effect, because the reason behind the rule becomes central to its constitutionality.

    • itchy says:

      I’m not arguing one way or another on the constitutionality, because I don’t know enough about the intricacies of law. I can, however, argue about consistency and whether any of this makes sense.

      “It’s wrong, I think, because, in the eyes of the law, optics matter. The reasons why a law is passed are as important as the effects of the law, under many constitutional provisions. And if we presume that it is unconstitutional to apply mandate economic inactivity or what have you, then the fact that you can effect the same result in a different way doesn’t really matter all that much.”

      I don’t understand why this is so. Why do optics matter? Why doesn’t effecting the same result matter?

      “But if you believe that penalizing inactivity or what have you is beyond the pale of the constitution, then the distinction does matter, regardless of the effect, because the reason behind the rule becomes central to its constitutionality.”

      How can one simultaneously believe that penalizing inactivity is beyond the pale but taxes are OK? How can “Give me $5” be unconstitutional while “Give me $10 and I’ll give you back $5 if you ask” is OK?

      • Alex says:

        Well, when I say optics matter, I mean that the underlying purpose behind the law matters, which is true as a general constitutional rule.

        A state law banning peyote, for example, passes constitutional muster because it is a general criminal/welfare/drug law that affects everyone equally. But if a court finds evidence that the law was passed specifically to spite Native Americans (who use peyote in religious ceremonies), then the law would be invalid as a violation of the First Amendment.

        Similarly, a city zoning ruling rejecting a permit for low-income housing is constitutional even if it disproportionately affects minorities, unless you can show that this effect was the purpose for the decision.

        Now, the question of how to determine the purpose of behind a state’s action is a hard one, and there’s a lot of law on it. (And very few people would dispute that this kind of rule sometimes lets officials conceal their true rationales to do things that would otherwise be unconstitutional, but that’s a whole different argument.)

        But in this situation, Congress was clear that this was not a tax, this was a penalty. They did this because of the optics of the situation. Perhaps a tax would have passed, perhaps not. We can’t know that now, but we do know what the legislators wanted and did pass. Once Congress picks a rationale that is unconstitutional (again, assuming that things come down that way), the Court is going to take that at face value, and the fact that you can do the same thing some other way won’t stop them.

  3. itchy says:

    But in your peyote example, even if the law was not passed specifically to spite Native Americans, the court still could rule it unconstitutional if it finds that the law discriminates against Native Americans, no matter the intention of the legislature.

    This happens a lot, no? In redistricting challenges, for instance, but in other cases as well. I’m pretty sure I’ve seen cases like your city zoning example where the law is struck down despite the intentions of the legislative body.

    In the case of the health care bill, I have no argument that Congress was intentionally trying NOT to pass a tax, and I don’t think the bill would have survived had the mandate been presented as a tax. They absolutely tried to find a way around it.

    Again, I’m not well versed enough in the law to opine on the constitutionality in this case — and I’m sure it is complicated enough that one could present examples on both sides. Of course, that doesn’t mean it makes sense!

    • Alex says:

      Well, you’re right, kind of. It is also true that if a law does not have a discriminatory purpose, it could still be illegal. (We don’t have to get into details on how the Court makes that decision, but suffice to say that a law with an intent that is valid on its face could still have a combination of too weak of a reason or too discriminatory a result, leading to its demise.)

      But my original point was that intent matters. The fact that a good intent is not always enough doesn’t undermine my point, I think.

      (By the way, both of those examples are from Supreme Court cases, so at least in those two situations, we know the result.)

      However: In a post Steve makes today — The Limiting Principle — Jack Balkin makes an argument (in his third point) that the penalty meets the Court’s definition of a tax. My argument is that the penalty, if not valid under the commerce power, can’t be upheld under the taxing power because it runs afoul of the rule that the tax must not be a “criminal penalty in disguise.” He seems to disagree (though it’s not to me clear why just from that one blog entry). Balkin is clearly more versed in constitutional law than me, so … take the argument as you will. (Purely for my own benefit, I plan to look into some other stuff he wrote to see where we differ.)

      • itchy says:

        Yes, I know the examples I gave are the converse of what you originally stated. In that sense, it seems like intent/optics only matters in one direction. If a legislature has good intentions it doesn’t get cut any slack by the courts if the effect is the same as a law with malicious intent.

        (To get really good data, we would want to find an example where a legislature intended to discriminate but bungled the law and failed — where there actually was no harm done to the targeted party. I wonder what the courts would rule? Strike the law down because of “optics”?)

        Again, the health care bill is not about discrimination of any sort (unless the court views it as intentional discrimination against healthy people). I still see the difference as mostly semantic. Yes, passing it as something other than a tax was a political maneuver, but the intent was the same, in my opinion. So I’m OK even when taking “optics” into account. But I’m not a Supreme Court justice.

        Thanks for the discussion. I’m not entirely comfortable with the concept of intent playing such a large role in a decision that is solely over whether a law is constitutional, but it’s helpful to know if that really is the case.

  4. Alex says:

    Just to come full circle: I realize that the flaw in my argument has been that the constitutional rules I’m thinking of are applied in situations where a state actor is discriminating against some kind of protected class (and you kind of note that). My sense was that the court would use a similar analysis to determine whether the mandate is a “criminal penalty in disguise” — using Congress’s expressed intent as a starting point.

    But it’s not clear to me, after doing some more reading, that the court would apply the same filter in that situation. After all, the Court is supposed to give Congress the benefit of the doubt and presume constitutionality. The law, at least as far as I’ve read, isn’t definitive on this topic.

    Also, going back to Balkin’s argument: he seems to disagree with the premise we started with, that Congress expressed a clear intent for this to be a penalty, not a tax. I’ll admit I haven’t read the statute, so I was just assuming based on what I’d heard. If you can argue the facts on this, then all bets are off.

    That’s all from me on this topic, I think. Thanks for indulging us taking over your post, Steve.

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