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Megan McArdle

Megan McArdle - Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. She is currently on leave.
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Megan was born and raised on the Upper West Side of Manhattan, and yes, she does enjoy her lattes, as well as the occasional extra-dry skim-milk cappuccino. Her checkered work history includes three start-ups, four years as a technology project manager for a boutique consulting firm, a summer as an associate at an investment bank, and a year spent as sort of an executive copy girl for one of the disaster-recovery firms at Ground Zero � all before the age of 30.

While working at Ground Zero, Megan started Live From the WTC, a blog focused on economics, business, and cooking. She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of the set. From there it was but a few steps down the slippery slope to freelance journalism. She has worked in various capacities for The Economist, where she wrote about economics and oversaw the founding of Free Exchange, the magazine's economics blog. She has also maintained her own blog, Asymmetrical Information, which moved to The Atlantic, along with its owner, in August 2007.

Megan holds a bachelor's degree in English literature from the University of Pennsylvania and an M.B.A. from the University of Chicago. After a lifetime as a New Yorker, she now resides in northwest Washington, D.C., where she is still trying to figure out what one does with an apartment larger than 400 square feet.

It's a Penalty ... It's a Tax ... No, It's SUPERMANDATE!

By Megan McArdle
Dec 17 2010, 7:44 AM ET Comment

So the latest talking point I'm seeing is that the individual mandate is no big deal--just a tax dodge like we've always had.  The government is raising taxes, and then giving a deduction of equal size to those who buy health insurance.  Why the fuss?


Well, for starters, this is not what they wrote in the law.  They called it a penalty.  Now they're worried that maybe their Commerce Clause powers aren't quite as great as they thought, suddenly it's a tax.

Judge Hudson argues that in fact Supreme Court jurisprudence distinguishes pretty well between a tax and a penalty: a tax is primarily aimed at raising revenue, while a penalty is primarily aimed at changing behavior.  If that's true, then by no stretch of the imagination can you argue that the mandate is a tax, since the revenue it raises is trivial in the overall scope of the law, while the behavior change is critical.  But I am no lawyer, and don't know whether he's right.  Let's say he's wrong, and it is a tax.  What sort of tax is it?

What it isn't is an income tax.  We know this for several reasons.  First of all, it is not related to income.  I think there actually is a way to sort of do this through the income tax code--lower the standard deduction by $750, then offer a $750 allowance to anyone who has health insurance*.  But they didn't do this--no matter how much it is claimed retroactively that this is effectively what they have done, legally they haven't.

Moreover, if they had done it this way, it wouldn't work.  While such a maneuver would undoubtedly pass constitutional muster, it then wouldn't operate the way the government needs it to--which is to say, as a penalty, modifying behavior.  That's because too few people pay much in federal income taxes--and the standard deduction does not affect your payroll taxes, which they do pay.  Worse, the people who don't pay taxes are the people most likely to a) go uninsured and b) be deterred from going uninsured by the threat of a penalty.

Even if that weren't true, setting it up this way is too amorphous: you'd have broken the psychological link between not buying insurance, and having to pay the government an extra $750.  Framing matters.  This is also why we can't give everyone in the country $750, except for the people who haven't bought insurance, which might well also be on sounder constitutional ground.

Could it be an excise tax?  As far as I'm aware, there's no precedent for an excise tax on being alive.  Or rather, there is.  We call it a "head tax".  As far as I know head taxes fall under the category of "direct taxes" in the constitution, which means they have to be apportioned among the states according to their population in the census.

You can probably see that this wouldn't work so well.  The state of Massachussetts, with 5% uninsured, would have to pay based on its population, not on its success in getting that population to buy insurance.  So would the state of Nevada, where 20% of the population lacks insurance.  This would not only make Deval Patrick very grumpy, but also would break the link between the penalty/tax/deduction/whatever and the behavior we are trying to change.

As a principal, "the government has gotten away with entirely too much meddling in the tax code" is certainly a sound statement.  But it does not therefore follow that we should be happy to allow them to do more--and by so meddling, to do an end-run around their enumerated powers.  Nor does it really follow that this is no different--when you look at the various sorts of taxes that the government could legally enact in keeping with the law and past precedent, they don't look very much like this one.  When I drill down to the actual mechanics of the tax code, and the constitution, none of the government's arguments make much sense to me, which is perhaps why they keep coming up with new ones.

Of course, as I say, I am no lawyer.  If there are subtleties that I am missing, I am sure that more than one someone will explain them to me.


*  As I say, I think this would work, but I don't know--how easy is it to give what is essentially a tax deduction to people who don't itemize?


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