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.


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.

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