Tax or Penalty?
The United States Supreme Court ruled that the ACA is constitutional. However, there was an interesting twist in the ruling: while the administration’s main argument for the mandate was made in the context of commerce, this was rejected. Instead, the ruling noted that the ability to impose the penalty for not purchasing the insurance did legitimately fall under the right of congress to tax.
Not surprisingly, a rhetorical battle began shortly after the ruling regarding whether or not the penalty is a tax or not. The Republican’s main narrative is that the penalty is a tax and that it will be very bad indeed. The Democrat’s main narrative is that it is a penalty and that it is a necessary if not good thing. There is, of course, the question of what the truth of the matter might be.
Given the ruling, the Supreme Court’s view (or at least 5 of the 4 members) seems to be that the penalty is a tax. This is mainly because the power to impose the penalty comes under the power of congress to tax rather than being justified in regards to commerce. As such, the idea that it is a tax has a reasonable foundation. That said, it seems to be an unusual sort of tax in that it functions more like penalty-that is, one pays it for failing to do something that is required.
On the face of it, taking the penalty to be a tax is somewhat like taking a ticket for not wearing a seat belt (a common practice in the United States) to be a tax. After all, one has to pay a penalty for not following the requirement to wear a seatbelt just as one has to pay a penalty for not following the requirement to get insurance. It seems rather odd to call such penalties taxes. After all, folks generally don’t say things like “I was taxed for speeding today” or “I got taxed because I parked illegally.” In the case of penalties, they generally seem to aim at punishing people for what they did (or failed to do).
While taxes do cause pain, they generally seem to differ from penalties. After all, when I pay a sales tax, this does not seem to be a penalty (or maybe it is—perhaps I am getting punished for buying local rather than via Amazon.com). Similarly, when my salary is taxed, I find that unpleasant, but it is not intended to deter me from working. That is, it is taxing but not penalizing.
As such, the penalty would seem to be a penalty that has been legally justified under the power to tax.
The obvious reply to this is that this makes all the difference. While it is a penalty, it is justified under the power to tax and is thus a tax. This, of course, does raise a question about what justifies the state in imposing penalties. The state can, of course, arrest me, lock me up, take my property, and kill me and these are justified in terms other than taxes. That is, an execution is not a tax one pays with one’s life. If the state can impose such penalties to get people to do and not do things without them being taxes, then it seems to indicate that the penalty in the ACA could be so justified. The main difference is that the mechanism of imposition is via the IRS rather than via the police.
The obvious reply to this is that involving the IRS makes it a tax—after all, that is what they do. If the penalty was handled another way by another agency, then it might not be a tax. But, if it is handled via the IRS, then it is a tax.
While this does have considerable appeal, there are other cases in which one agency performs a function that does not automatically make it a function of that sort. For example, the military sometimes functions in a police role or a firefighting role, but it would not be claimed that police functions or firefighting are thus combat actions because they are done by a government body that normally engages in combat. Likewise, just because the IRS is providing the mechanism by which the penalty operates, it need not be a tax.
The counter to this is, of course, to note that the IRS is handling it like a tax. So, if it walks like a duck and quacks like a duck, then it is a duck. So, the penalty is a tax.
At this point (if not earlier), readers might be wondering why it matters. After all, calling it a “tax” or calling it a “penalty” does nothing to change anything about the penalty/tax and this makes it seem to be a mere semantic point.
This does, in fact, seem to be the truth of the matter. The main dispute is not something substantial that would change the law if one side was right and the other wrong. Rather, it seems to be entirely a rhetorical battle. On the current typical Republican narrative, if something is a tax, then it is bad. So, if the penalty is a tax, then it is bad. By imposing this tax, the ACA is also bad. Plus, Obama claimed he would not raise taxes for the non-wealthy and that the penalty is not a tax—so if it is a tax, he would be wrong twice. As such, the Republicans can score rhetorical points if it is seen as tax.
On the Democrat’s narrative, the penalty is a penalty, but it is what makes the ACA work and hence it is a good thing because the ACA is a good thing. Plus, the claim is that only a tiny percentage of people will actually be impacted by the penalty.
Thus, it does seem that the dispute is not over anything substantial but rather a rhetorical battle. This is not to say that the dispute is not important. It is, since there are political points to be won or lost here based on which label sticks. For those of us on the receiving end, whether it is a tax or penalty does not seem to change anything—either way we have to get insurance or pay. Or do we?
One part of the dispute that does have substance is the matter of the impact of the tax/penalty (perhaps it should be called a tanalty as a bi-partisan compromise). On the Republican narrative, it is supposed to be something both substantial and bad. On the Democrat’s narrative, it is supposed to be minor and good (or at least necessary).
Interestingly, Forbes did an analysis of the penalty that seems to indicate that both narratives are flawed.
It is estimated that, using today’s data, that about 7% of those under 65 would face the possibility of the tax/penalty. The other 93% either have insurance or are exempt from the penalty/tax.
Of those who might be subject to the tax/penalty some will probably buy insurance. About 60% of them will qualify for insurance subsidies. 3% of those possibly subject to the penalty/tax will have to pay full price. Of course, changes in 2014 (when the law goes into effect) could result in changes in these numbers. However, unless there are radical changes, the vast majority of people will not be subject to the tax/penalty.
But, suppose that a person is subject to the penalty/tax and a person refuses to get insurance. The Republican narrative is that this will be a significant tax while the Democrats claim it will not be that bad.
The price starts off at a modest $95 in 2014 and increases to $695 or 2.5% of your income (capping at $2,085—adjustable for inflation). While not something I would like to pay, the penalty/tax is not terribly high. Of course, I am sure that most folks would prefer to avoid paying it at all—which seems to be something that can easily be done.
While the law specifies that the IRS is to enforce the law by imposing a tax penalty, the law also prevents the IRS from using most of its standard tax enforcement methods. For example, the IRS is not permitted to treat the refusal to pay the tax penalty as a criminal act, thus eliminating that avenue of enforcement. Imposing a tax lien will also apparently be rather difficult. In fact, Professors Barry and Camp contend that the mandate is not very mandatory.
The main tool that the IRS does possess in the context of the ACA is that it can reduce a person’s refund. This does provide some bite since about 2/3 of taxpayers get a refund. This does lend some credence to the penalty being a tax—after all, by removing it from the refund it as if the person’s tax burden has increased. Of course, the overall result is the same as a penalty—a traffic ticket for $95 would have the same overall impact as the penalty in 2014.
Of course, even this bite is not as toothy as it might seem. After all, low income households are exempt from this tax penalty and hence their refunds would be untouched even if they decided to do without insurance.
In the face of this, it would seem that the Republican narrative that the tax will be a significant burden seems to be untrue. After all, it will not apply to the vast majority of people, the price itself will be fairly low, and it seems that even those subject to it stand a good chance of being able to avoid it. At most, it will impact those who are well off enough to afford insurance and who will receive a refund and who do not have insurance. That will probably be a rather small number of people.
Ironically, the same facts that seem to defeat the Republican narrative also seem to undercut the main point of the tax penalty. The ACA requires that pre-existing conditions can no longer be a factor in a person qualifying for a policy or its cost. Naturally, the insurance companies are in the business of making money, so they need to cover the additional costs this will impose on them. The tax penalty is supposed to be onerous enough to push people into buying insurance, but it does not seem to be harsh enough or certain enough to serve that function. It also does not seem that it will generate enough revenue to help offset the increased cost. This, interestingly enough, does support another Republican narrative, namely that the ACA is supposed to increase insurance costs. Somewhat ironically, this narrative seems plausible because of the seeming implausibility of another Republican narrative. After all, if the tax penalty were as onerous and sweeping as has been claimed, then it would either push people to buy insurance or provide revenue to offset their failure to do so. As such, it would seem that both parties appear to be in error. That, I am sure, shocks no on.