New Taxes!

My friend Jeff Miller has written an interesting response to my post about taxation and the individual mandate.

The crux of his argument is that I’m wrong when I agree with Chief Justice Roberts that the individual mandate’s tax/penalty is well within the federal government’s taxing authority:

Justice Roberts’ decision has, in fact, expanded the taxing power of the United States, and it does so in a way that ought to us feel uncomfortable.  Even if you agree with the decision, it is not accurate to characterize this decision as ordinary.

My sense is that we’re probably at loggerheads here.

I think that the majority opinion is convincing in its interpretation of the Constitution. Miller disagrees. I’m eventually going to swtich from the example of the child tax credit that I used in my original post to illustrate why I think Roberts’ decision works but for now we’ll stick with the example of having children.

Here’s how I summed it up in my first blog post on the topic:

I have a child; I get a credit and thus pay less. You choose not to have a child; you don’t get a credit and thus pay more. Your inactivity results in a higher tax burden. Just like the inactivity with regard to purchasing health care.

For Miller, I’m mixing things up:

For Ari, the following two laws are the same:

1.  You are required by law to have children, and will be subject to a financial penalty if you fail to do so.

2.   You may take a credit against the income taxes you owe if you have children.

There is a very real difference in these laws, of course.  Under one of them, failure to have children is a credit against taxes owed based upon one’s income.  Under the other, you have to pay a penalty for failing to have children regardless of your income.

The first law is the new sort that Roberts’ decision has created, according to Miller, whereas the second law is the one that has existed for some time. This is the one that Roberts thinks corresponds to the mandate’s tax/penalty.

Having now read the decision a second time, I remain convinced that Roberts understands what he’s doing in the ACA opinion. Under Roberts’ understanding of the taxing power, the first law could be found constitutional. If Congress really wants to encourage having children, legislators could pass a law that assigns a tax/penalty for those who voluntarily elect not to have a child. A law like this would be massively unpopular, and I think it’s likely that all of the Justices would oppose it.

But whether or not absolutely everyone opposes it doesn’t actually speak to its constitutionality. And this is precisely what Roberts writes in his opinion: “Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

Now that’s true of the health care tax/penalty … but there’s a big difference between having a child and buying health insurance. And that’s why Roberts doesn’t use the child tax credit in his opinion; instead, he uses the examples of credits for home ownership and professional education. It was my error to use the child tax credit in my blog post, as it obfuscates things quite a bit; Roberts doesn’t make the same error.

Here’s the difference: All of the examples that appear in the majority opinion involve the government using taxation to influence citizens’ choices with regard to goods and services that can be purchased. In addition to the examples of buying a house or an education, Roberts gives the following examples as well:

Although the payment will raise considerable revenue, it is plainly designed to expand health insurance coverage. But taxes that seek to influence conduct are nothing new. Some of our earliest federal taxes sought to deter the purchase of imported manufactured goods in order to foster the growth of domestic industry. See W. Brownlee, Federal Taxation in America 22 (2d ed. 2004); cf. 2 J. Story, Commentaries on the Constitution of the United States §962, p. 434 (1833) (“the taxing power is often, very often, applied for other purposes, than revenue”). Today, federal and state taxes can compose more than half the retail price of cigarettes, not just to raise more money, but to encourage people to quit smoking. And we have upheld such obviously regulatory measures as taxes on selling marijuana and sawed-off shotguns. See United States v. Sanchez, 340 U. S. 42, 44– 45 (1950); Sonzinsky v. United States, 300 U. S. 506, 513 (1937).

What’s more, Roberts notes that the decision to forgo health insurance coverage isn’t made unlawful; it’s simply taxed such that citizens can lawfully make their own purchasing decisions:

While the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do so is unlawful. Neither the Act nor any other law attaches negative legal consequences to not buying health insurance, beyond requiring a payment to the IRS. The Government agrees with that reading, confirming that if someone chooses to pay rather than obtain health insurance, they have fully complied with the law.

The same would be true of other items that the government might want to induce citizens either to purchase or not to purchase. You can buy something that the government is attempting to induce you not to buy, or choose not to buy something the government is attempting to induce you to buy, but you have to pay a tax based on your purchasing decision.

What all of this means is that — even after this Supreme Court decision — the federal government can’t compel you to have children, as Miller and some others fear.

Of course, it seems that the federal government could compel you to buy a house … but only so long as the price of a house is significantly more expensive than the tax/penalty assessed for not buying a house, as the Supreme Court has asserted that the penalty can’t be a “’prohibitory’ financial punishment.”

But is this a new tax? Is it a new way of thinking about taxes? I still don’t think so.

You never have to purchase something you don’t want, even though the government strongly believes that it’s a very important thing for you to have.

And as Roberts sums up:

Indeed, “[e]very tax is in some measure regulatory. To some extent it interposes an economic impediment to the activity taxed as compared with others not taxed.” Sonzinsky, supra, at 513. That §5000A seeks to shape decisions about whether to buy health insurance does not mean that it cannot be a valid exercise of the taxing power.

This tax/penalty seeks to shape your decision about whether or not to buy heath insurance … just as the tax on cigarettes seeks to shape your decision about whether or not to buy cigarettes. Again, if you choose not to buy health insurance, then you pay the tax/penalty; if you choose to smoke cigarettes, then you pay the tax penalty when you buy them.

You can still do exactly what you want to do … even though both of these things have societal costs that you’re passing along to others. You just have to pay for it.