Individual mandate and the power to tax
by havoc
I happened to stumble on this Yale Law Journal Online article yesterday. I hadn’t realized what the court cases about the individual mandate were (at least in part) arguing.
Credits and penalties
The individual mandate is structured as a tax penalty (i.e. an extra tax hike) if you don’t have health insurance. Those of us who have lived in Massachusetts know what it might look like, since it’s modeled on “Romneycare.”
The thing about a tax penalty, as far as I can see, is that it’s economically identical to a tax credit plus a tax hike. That is, say I’m the government and I want people who do not buy child care to pay $500 more tax than people who do buy child care. I can either increase taxes across the board $500 and then offer a $500 credit if you buy childcare; or I can increase taxes by a $500 penalty if you don’t buy childcare. In either case, if you don’t buy childcare, you pay $500 more than before, and if you do buy it, you pay the same as before.
Certainly the credit and the penalty are a different “spin” – I’m sure people have a different reaction if the tax forms say “you must do this or pay a penalty” vs. “you can do this to get a credit.” There’s a psychological difference. But if people were completely rational and didn’t look at the wording, the fact is that it doesn’t matter to their pocketbook what the tax forms call the rule. The rule is simply “you pay less if you buy X and more if you don’t.”
The tax code is already full of credits for buying stuff. Well-known ones include child care and the temporary first-time homebuyer credit. And… you can even deduct health insurance costs already.
The new law’s penalty for not having insurance is identical to raising taxes by the penalty, and then allowing anyone who has insurance an additional credit, on top of the existing deduction, equal to the penalty.
The penalty means you pay less on taxes, partially offsetting the cost of insurance, if you buy insurance. That’s all it means.
In the same sense, the tax code already requires you to buy insurance (if self-employed anyway). The new penalty increases the incentive somewhat, but there’s a tax incentive to buy insurance today.
(I realize there are complicating elements to how this works — phase-outs, credits vs. deductions, refundable vs. nonrefundable credits, etc. — but I don’t think they matter for this discussion.)
Some implications
- There’s a claim in these cases that the government has never required people to actively buy a certain product. However, at least the enforcement of this requirement, i.e. a tax savings if you do buy, is precisely equivalent to all the credits and deductions you can already get for buying various things. Go into TurboTax and look at the credits and deductions available. You are “required” to buy all of that in exactly the same sense that you are required to buy health insurance under the new law — at least as far as enforcement goes. The punishment is the same, you pay higher taxes if you don’t buy.
- In fact there’s a popular argument “can the government make you buy GM cars?” — and yes, there have been tax credits for buying certain kinds of car (hybrid, electric, whatever). Which means you pay more (you are penalized) if you don’t buy those cars. The government can, under current law, punish you through taxation if you don’t buy the right car.
- Because there’s not an economic difference between the penalty and a hike+credit, and people don’t want to argue all the existing credits are unconstitutional, the legal argument in these court cases seems to be that it’s unconstitutional because Congress called it a penalty and not a tax. “No calling it a penalty when it’s a tax!” is some kind of grammar-nerd point, not something that should inspire throwing crates of tea into the harbor…
- The Yale Law Journal Online article makes two points on this, first that the statute does call it a tax in many places, and second that Supreme Court precedent since the 1860s is that it doesn’t matter whether it’s called a tax or not, when judging constitutionality.
Laurence Tribe’s argument
Laurence Tribe predicted an 8-1 vote to uphold the individual mandate. He says:
There is every reason to believe that a strong, nonpartisan majority of justices will do their constitutional duty, set aside how they might have voted had they been members of Congress and treat this constitutional challenge for what it is — a political objection in legal garb.
He feels that the law is so clearly constitutional according to precedent, on both interstate commerce and tax power grounds, that the Court will have no coherent way to strike it down.
I see his point, based on the power to tax. Interstate commerce may be a fuzzier issue, I don’t know. But the government only has to have the power on one ground. If it’s constitutional using the power to tax, it’s constitutional.
Discussion
There’s no need to post comments about whether the government should have a taxation power in the Constitution, or whether the health care law is a good idea, or any generic debate like that.
In this post I wanted to raise the issue of whether a tax incentive to buy insurance is constitutional following existing precedent, and whether it can be legally distinguished from other tax incentives (whether framed as credit or penalty) that involve buying particular goods and services. I don’t see where the distinction can be made. Anyone have any good theories?
I am not a lawyer, if you are one, please add your thoughts!
Update July 2011
The Sixth Circuit discussed this topic in their ruling, here’s a new post on it.
Update June 2012
The deciding vote from John Roberts was based on this same tax power argument.
The government also requires you to buy a house and punishes renters by allowing you to deduct your interest.
I don’t believe “economically identical” is the right measure for this. The Supreme Court rejected an argument based on economic identicalness raised in Arizona Christian School Tuition Organization v. Winn, considering the economic effect of a contribution to a “tuition organization” (potentially one affiliated with a religion, at the contributor’s choice) for which the state would grant an equivalent-value tax credit, arguing that this was identical to a First Amendment violation. You might disagree, but it’s what the Supreme Court’s said in the past.
Interesting case you linked to, thanks!
In the health care case, it seems like the identity is not only economic but an identical mechanism – namely the tax return. Literally if you were programming TurboTax, exactly the same program logic could be labeled a penalty or a credit, I would think, by just inverting the way the checkbox was labeled. “check if you bought X, to get credit” or “check if you bought X, to avoid penalty” … It feels like solely and purely a difference in label, to me.
I’m wondering if there’s some legal sense in which just paying the penalty on purpose to avoid buying insurance is not OK. i.e. Is there any other sense in which there’s a requirement, beyond the change in taxes due. Am I somehow “technically” making an illegal decision even though there’s no consequence other than a tax increase.
reading more on it, It seems like that tuition organization case says a tax incentive is not harming those who don’t make the decisions the incentive rewards. Someone here is paying more taxes for failure to give to the tuition organizations, and the court thinks that’s fine and they can’t sue.
I can imagine this ruling helping uphold the health mandate… logically, it implies to me that tax penalties are not penalties, just collateral damage from credits 🙂
But I can tell I don’t understand a bunch of stuff in the opinion, as a non lawyer.
Another interesting aspect of this is that the government could not pay directly to the tuition organizations under the first amendment, but could pay indirectly through a tax credit.
Many have argued that the individual mandate is unconstitutional because the government pays indirectly, through a tax credit, i.e. because people have to buy the insurance from a private company; and that the individual mandate would pass muster if the government taxed people and then paid for insurance directly instead of requiring people to buy it themselves.
In that sense the two cases are reversed, perhaps.
In 1798, Congress passed, and John Adams signed, a law setting up an individual mandate for seamen to buy into a health insurance plan. Because of this, those conservative justices who elevate original intent above all else would be forced to find “Obamacare” constitutional.
See http://blogs.forbes.com/rickungar/2011/01/17/congress-passes-socialized-medicine-and-mandates-health-insurance-in-1798/
As for me, I would prefer having people who don’t want to buy private health insurance to buy into a public plan. But the choice between the two ideas is just a policy argument, not a constitutional argument.
I write on the Constitution using The Federalist Papers to show the original intent. Supreme Court jurisprudence, however, bears no resemblance whatsoever to the intent of the Constitution as drafted and as ratified.
Today, instead of looking to the Constitution, to see what it authorizes the federal government to do, lawyers [present company excepted] look to supreme court precedent to see what THEY say the federal government can do. Because of this, we have become a country where one branch of the federal government (judicial branch) is the SOLE arbiter of what the other two branches may do – and what The States and The People MUST do. That is tyranny and I address this in my paper published yesterday at http://canadafreepress.com/index.php/article/35583 and on my blog.
Your post above is extremely well written, and yours is obviously a well-tuned intellect.
Permit me to show you the differences between the original intent of the Constitution (the Constitution which was ratified) and the version which has been completely re-written by the supreme Court.
I have written four papers on obamacare – here they are:
http://publiushuldah.wordpress.com/category/health-care/
I will write a 5th on the so-called “taxing clause” – perhaps I will link to your blog if you don’t mind. For now, I will say that the “taxing clause” does not constitute an independent grant of substantive powers to Congress – i.e., it doesn’t permit Congress to tax for whatever purposes a majority of they want. Rather, Congress may lawfully levy taxes only to raise money to fund its enumerated powers (Art. I, Sec. 8, clauses 3-16).
Regards, PH
Would you argue the proper principle for striking down the individual mandate would also strike down existing tax incentives (credits/penalties/deductions)?
It gets tricky since some (all? most?) deductions are really attempts to define income by subtracting expenses from revenues. Dropping all deductions would mean if you buy wholesale for $1 and sell for $2 in your store, you are taxed on $2. That makes it a bit tricky I think to decide which deductions are “OK” – if you want to keep it an income tax rather than revenue tax.
I’m guessing the current court cases brought by the state AGs are not arguing against existing tax incentives, but are trying to argue the individual mandate’s penalty is a distinguishable kind of incentive.
The proper principle for declaring obamacare unconstitutional is that medical care is outside the scope of the powers delegated to Congress. Most of what Congress does is unconstitutional on that ground! I explain Congress’ Enumerated Powers as delegated by The Constitution, and how (in violation of the Constitution) we were transformed into what we have today (where the government claims the power to do whatever they want) in this paper: http://publiushuldah.wordpress.com/2009/09/08/congress-enumerated-powers/ You will be amazed. Read it, and my four papers on health care, and then ask whatever you like.
Clarence Thomas is the only one of the current justices who would have some sympathy for your perspective, I think. That’s why Laurence Tribe says 8-1 and not 9-0.
I don’t think the individual mandate lawsuits are arguing in this framework because they could not win (and if they did, the public outcry would be enormous, probably to the point of passing a constitutional amendment to re-allow what the courts struck down).
Social Security and many other federal policies have an overwhelming majority (70-80%, not 50%) public support which is plenty to amend the Constitution if required.
To me that makes this framework a bit of an academic exercise, i.e. it is not likely to change policy.
Unfortunately, we must distinguish between: (1) What the Constitution actually says and (2) What most judges & lawyers say. There is a huge gulf between the two.
And yes, was it Fabian socialist Geo. Bernard Shaw who said that a government which robs Peter to pay Paul can always count on the support of Paul?
Our national moto was, “In God We Trust!”. Today, it is, “Take if from somebody else and give it to me!”
And because we have so many people in this country with their hands out, all seeking to live at other peoples’ expense,. our Country is collapsing financially & morally. Envy, theft & plunder have become legalized.
I am attempting to turn on the lights everywhere I can.
Also curious what you think of the 1798 Marine Hospital Service bill that Joe Buck mentions above.
From the beginning of our Republic, some in Congress began to expand the powers of Congress in violation of the Constitution. Congress has no authority under the Constitution to require private ships and civilian sailors serving on such private ships to buy health insurance.
And in any event, we do not look to acts of Congress to see what is constitutional! To argue that an act of Congress is constitutional because the Congress passed it, would be to make Congress the sole judge of its powers; and further, that Congress’ views on constitutionality could bind FOREVER the other two branches as well as THE PEOPLE! Surely one can see that such a position is clearly absurd and antithetical to our Founding Principles.
um, that would be “…a majority of them want.”
The problem I have with this whole line of reasoning is that it fundamentally misunderstands taxation.
The single and sole purpose of taxation is to pull money into the government to pay for government expenses.
Everything else is an externality that, while interesting, distracts from this purpose.
When we step into the realm of trying to manage these externalities through clever taxation schemes we do much the same thing as programmers who concoct excessively clever mechanisms to solve interesting, but out of scope, problems: the code becomes a snarled mess that no longer performs its intended purpose as well as it could.
It’s like many issues in the IT world that follow the same line of reasoning. Sure, the Constitution, through the interpretation levied by the current SCOTUS, may technically allow such things to occur, but that’s not the same as it being a good idea.
My reasoning here is intended to be about what the courts would allow, or rather would allow if they are self-consistent, rather than about what’s a good idea.
I have an opinion on what’s a good idea, also, but in theory the court challenge can’t consider that and is not about that.
The legislature is supposed to decide what’s a good idea and the courts are just supposed to be sure they are “in bounds,” not second-guess the judgment calls.
NO! Congress is not supposed to decide what is a good idea.
In the Constitution, WE THE PEOPLE delegated to Congress “enumerated powers” (Art. I, Sec. 8, clauses 1-16). When Congress assumes powers other than those delegated to it, it usurps power and acts lawlessly. Read the paper on enumerated papers! You will be reeling with shock before you finish.
Whether this health care policy would be a good idea overall simply isn’t at issue in court. The court case is about what powers Congress has.
I WISH the issue in the litigation were the enumerated powers of Congress!
btw, I tend to agree that tax incentives (credits and penalties) are bad. The reason we have them (in my opinion) is that voters somehow think a tax credit isn’t the same as just giving people money, even though it mostly is. People wouldn’t approve of just giving everyone money to buy a house, but they do approve of the mortgage deduction.
I guess, based on that Arizona tuition organization case Jeff mentioned earlier, the courts don’t think tax credits and handouts are the same either.
The two rationales for using tax credits I can think of are: 1. efficient to use existing IRS bureaucracy instead of inventing new agencies and forms; 2. nonrefundable credits require you to make money to get the handout, which some may consider good, I don’t know.
The efficiency argument isn’t bad, but you could just put the IRS in charge of handouts, too, without calling them credits.
I think mostly tax credits are a marketing spin on giving people handouts for certain activities/decisions/purchases. It’s mental accounting (http://www.investopedia.com/university/behavioral_finance/behavioral5.asp) at work, that somehow giving you “your” tax money is different from giving you “non-tax” money, as if the government kept the two separate.
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