When is a Tax Not a Tax?

Megan McArdle and I have been having an interesting discussion in the comments to my last ObamaCare post. She’s convinced me that the ObamaCare individual mandate is structured in a way that would be difficult to actually duplicate within the structure of the existing tax code. Many taxpayers pay no income tax, so if Congress simply created a health insurance tax credit (and raised rates or reduced the standard deduction to make it revenue-neutral) it wouldn’t be creating any incentive for the lowest-income (non-)taxpayers to get health insurance. The ObamaCare mandate deals with this problem by creating a brand new quasi-income tax with a weird structure. As Ezra Klein describes it: “In 2016, the first year the fine is fully in place, it will be $695 a year or 2.5 percent of income, whichever is higher.”

I’m not a constitutional lawyer, but it doesn’t seem like it would be crazy for the court to hold that the minimum liability provision makes this a sham income tax that exceeds Congress’s taxing powers. I wouldn’t be upset to see the court say that. But it would be a very narrow holding. Congress could easily respond by creating a new tax that’s 50 percent of income below $1390, 0 percent on income between $1390 and $27,800, and 2.5 percent of income above $27,800. This is indisputably a tax on income and it’s mathematically identical for everyone who makes more than $1390.

But I don’t think this is what people are talking about when they say that the mandate is unconstitutional. I think they have something much broader in mind: that Congress shouldn’t be using the tax code to force people to do stuff they wouldn’t otherwise do and buy products they wouldn’t otherwise buy. But if so, then the courts have two options: One is to bite the bullet and invalidate the child tax credit, energy efficiency tax credits, college tuition tax credits, and so forth. Or two, they need a story about why coercing people to buy health insurance is more objectionable than coercing them to have children, pay tuition, take out a mortgage, or install solar panels on their house. Personally, I’d be happy to see the US tax code ruled unconstitutional. But I think it’s safe to say that the courts aren’t going to do that. And I have trouble imagining a principled argument for invalidating tax incentives to buy health insurance without invalidating a bunch of other tax credits that have long been regarded as constitutionally sound.

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11 Responses to When is a Tax Not a Tax?

  1. Hugh Akston says:

    There is a significant difference between giving people an incentive to act by using tax credits, and penalizing people for not acting by using punitive fines.

  2. Brad says:

    This argument is not at all sound. While mathematically it may be equivalent, there is a huge qualitative difference in a enacting real penalty for failing to buy a product selected and approved by the federal government, and a tax incentive designed to nudge policy in a certain direction. Nor is there any reason to think that striking down the individual mandate should affect the child tax credit, tuition credit, etc, at all. Those clearly fall within the taxing powers of Congress. The mandate is not a tax. It’s a requirement to buy insurance from a third party.

  3. Stephen says:

    The child tax credit is an effort to coerce people to have more children? Right, because obviously if it’s a choice between raising a child, and missing out on a $500 tax credit, there’s only one choice which makes any economic sense.

  4. hhoran says:

    The punitive fines”forcing people to buy something they don’t want” arguments are just as constitutionally nonsense as the taxation arguments. Have you heard any of the anti-Obamacare crusaders complain about governmental mandates to buy automobile insurance? No one is “forced” to buy car insurance, but if you don’t you can’t drive a car. The economic objectives of the Obamacare regulations could be equally achieved if no one is “forced” to buy into health insurance with these broad risk pools, but if you don’t buy in bu a certain age, you are not allowed to ever buy health insurance with similar risk pools at any point later in life.
    You or I may not like the exact results of the Affordable Health Care Act on various political or economic grounds, but it is ridiculous to claim that you can find wording in the Constitution that was intended to forbid this type of health care regulation, but wasn’t intended to block broad ranges of governmental involvement in economic markets. You can argue that the Commerce Clause has been improperly used to justify regulation of some clearly non-economic activities, but it is absurd to argue that health care–a huge and problematic part of the national economy–doesn’t count as interstate commerce.
    The founders were not purist libertarians. Last week’s Virginia decision and the agit-prop campaign on “constitutional” issues is “judicial activism” in its crudest, ugliest form–unelected judges overriding precedent and the legislative process in order to impose their personal preferences and biases on everyone else. Bad and excessive economic regulations are political issues. And as past threads on this blog have noted, the political forces aggressively fighting Obamacare have (with rare, unimportant exceptions) not been aggressively fighting to reduce the overall role of Washington in the economy. Have you noticed any of these forces fighting the McCarran-Ferguson Act, or other gross distortions of insurance markets that benefit politically powerful finance companies?

  5. Eric says:


    How is this any different than car insurance? Everyone who drives a vehicle is compelled to have car insurance, if you don’t you are fined, and your ability to drive, and act freely is restricted? Should the logical extension of this republicans actions to strike down ObamaCare also be to remove a requirement from having Car Insurance too?

  6. Scott says:

    @Eric: Not that I necessarily agree with the finding that the mandate is unconstitutional, but there is one salient difference between this and the requirement for auto insurance – you are not absolutely required to own and operate an automobile*, whereas if you want to *live* then health insurance is required by the mandate.

    Better to have gone for Medicare for All, or at least a public option that was not only available to all, but that everybody was taxed for. In that case, if some sop to the existing insurance companies was required, all you’d need would be to make payments of private insurance premiums fully deductible against the new payroll tax for medical coverage.

    *No matter how much it may feel like you are in certain areas – after all, people do still use the bus, subway, etc., even if the lack of their own cars may complicate their lives and restrict their options for both work and recreation.

  7. On auto insurance: it’s liability insurance, not insurance to cover yourself. You have no requirement to purchase insurance on the damage to your own car unless your car loan makes you. Essentially, you’re posting a bond in order to be allowed to operate your vehicle on public land (you don’t need insurance if the vehicle doesn’t leave your property, and in some states, you can post a bond instead). This is very, very different from the health insurance mandate–as if everyone were required to purchase collision damage insurance simply because this would lower the average cost of such insurance (which it probably would, with low-risk and poorer drivers subsidizing higher risk and wealthier ones).

  8. I agree with Megan. Car insurance mandates aren’t really comparable. Also, car insurance mandates are generally at the state level, so they don’t raise the same federalism issues as the federal health insurance mandate.

  9. hhoran says:

    Tim and Megan are both wrong in insisting that there is some huge constitutional and economic distinction between governmental coercion requiring the purchase of rudimentary auto insurance and governmental coercion requiring participation in national health insurance pools. Granted all analogies have imperfections but three points:
    1. All 50 states mandate some level of automobile insurance. Absolutely no one can own a car without having insurance. Police can demand proof of insurance from anyone at any time. Absolutely no one can “self-insure” and you can only buy insurance from companies specifically approved by the government. It is absurd to say this isn’t a “mandate”. Choosing not to ever operate a car (the only way you can evade this mandate) would cut 95% of all Americans off from meaningful participation in the economy.
    2. The state/federal distinction has nothing to do with the current debate and the current lawsuits. The lawsuits against Obamacare and bleeding heart Republicans are claiming a horrible loss of liberty and freedom when anyone can be mandated to buy health insurance. They are not saying that this is a narrow “states-rights” issue and that “mandates” are swell and wonderful as long as they come from state governments.
    3. Both driving and health care create serious, widely acknowledged externalities that can be substantially mitigated by insurance mandates. If car insurance was wholly optional, far fewer people would buy it. Undoubtedly, some individuals would pay a bit less under a laissez-faire approach. But there would be huge aggregate inefficiencies (adverse selection, distorted risk pooling, economic devastation to uninsured accident victims, cost shifting to the insured) since the number and cost of accidents wouldn’t change much. Similarly, eliminating health care “mandates” doesn’t reduce what the nation spends on emergency room care, and doesn’t reduce the financial devastation when families face catastrophic health care problems. Governmental intervention is addressing legitimate economic externalities in both cases, and is using mandated pooling to reduce both the aggregate cost and the distortions caused when subsets of society try to avoid paying their share of the costs.

    Again, the central point (that people like Megan refuse to address) is that there is absolutely no constitutional principle supported by any meaningful precedent that would allow you to draw a bright line line between the types of economic regulation embodied in the Affordable Heath Care Act, and dozens of other longstanding types of governmental regulation of economic markets such as auto insurance mandates or punitive taxes or direct regulatory bans.

  10. mello-yello says:

    hhoran, you are wrong that this isn’t a constitutional issue. The federal government can’t mandate this behavior. Massachusetts can. Conservatives don’t dispute Mass. right to do so. Courts rule on the enumerated constitutional powers of the federal government not some abstract powers of “government” like you might in a dorm room conversation.

  11. Dan H. says:

    I believe the fundamental constitutional difference here is that while it’s accepted that the federal government can impose conditions on you or levy taxes on you once you engage in commercial activity, the health care mandate puts a tax on you simply for being a citizen.

    The former type of tax has been justified by the federal government by invoking the Commerce Clause in the constitution. Some would say the Commerce Clause has been overused in the past but even so, it’s a stretch to invoke it to fine someone for not engaging in commerce. And absent the Commerce Clause, where else does the federal government derive the authority for this?

    In many ways, this is even worse than a poll tax, because a poll tax can be avoided by simply not voting. The poll tax was deemed unconstitutional by the Supreme Court in 1966.

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