I'm getting two arguments about the insurance mandate a lot.  First, I'm hearing that it's like car insurance, which is silly.  Car insurance is liability insurance requiring you to, effectively, post a bond in exchange for the privilege of operating dangerous equipment on public land.  You are not required to buy insurance to cover damage to your own car . . . nay, even though this would probably lower the cost of car insurance for everyone, and prevent you from ending up on welfare if your car was damaged and you couldn't afford to pay it and you lost your job and had to go on welfare.  Moreover, the requirement to buy car insurance is a state-level law.  States are not limited to the enumerated federal powers in the constitution, and do not have to route their meddling through the commerce clause.  Neither in principal, nor in legal practice, are these very similar, except that they both involve the word "insurance".


The second argument I am hearing is that really, this is no different from the mortgage interest tax deduction (there is a secondary line in child tax credits, but really, these are much the same argument, so we will consolidate all the claimants into the mortgage interest tax deduction).  Why should I worry about one and not the other?

First things first:  I now realize that I was probably wrong that you could simulate something very like the mandate penalty by lowering the standard deduction by $750.  Lowering the standard deduction or the personal exemption would, of course, reduce your tax liability by ($750 x your marginal tax rate), so I don't know how you would balance it out so that you raised $750 per person.  It is very easy to give everyone $750, but very hard to take exactly that amount from everyone, and the people most likely to avoid the penalty are the people whose behavior we are trying to change--the young, healthy, and poor.

So why not just give everyone $750 if they buy health insurance?  Well, in fact, you probably could do this.  You might even pay for it with higher income tax rates, though they would not be distributed evenly.  But there are problems with this approach, starting with the fact that well, this isn't what they did.

1)  Accounting for expenses is a legitimate function of an income tax  There are a lot of people out there who seem to believe that we enacted the mortgage interest tax deduction to encourage homeownership.  We didn't.  

What we did was eliminate the broad deduction for interest expenses, which had been created not to encourage anything, but to recognize that you cannot tax people on business income without also accounting for expenses; when the original tax code was passed, consumer credit was in its infancy and most interest income was a business expense.  By the time we got around to reforming this, in 1986, mortgage interest rates were very high, and it would have been politically difficult to roll back the deduction, as well as personally disastrous for a lot of taxpayers who had relied on the deduction in making their housing choices.  

2)  Intent matters That this has a side effect of encouraging homeownership (or raising house prices, whatever), is not the purpose of the law.  Many legitimate tax laws have side effects (like the bias towards debt finance in the corporate world), just as many legitimate business and personal transactions have tax side effects--I didn't move to DC just to get a tax deduction for moving to change employers, but it was nice that I did.

But f I do a transaction for no business purpose other than to minimize my tax liability, the IRS will dub this a sham transaction and make me pay the taxes anyway.  Similarly, I think sham laws aimed at creating a taxable event for some purpose other than raising revenue, are a bad idea.

3)  A transaction structured to look like the mortgage interest tax deduction would not function well as a penalty.  It wouldn't be a penalty--it would be a carrot, not a stick.  And carrots actually do work differently from sticks, in the tax code as elsewhere. Compare these two scenarios:

a) If I buy health insurance, I will become eligible for a $750 tax credit
b)  If I do not buy health insurance, I will have to write a check to the government for $750

Identical mathematically, they are very different psychologically.  Framing matters.  

But they are also different practically.  People are liquidity constrained (i.e., they don't necessarily have sufficient cash on hand at all times, and they can't necessarily borrow it).  They are also loss averse.  They are more likely to write a $200 monthly check to avoid having to write a check for $750 at the end of the year, than to get a $750 check at the end of the year.  (Maybe neither is so likely--perhaps the mandate won't work well.  But that opens up a whole new can of worms).  

4)  A transaction structured to look like the penalty wouldn't look much like the mortgage interest tax deduction.  For one thing, it would obviously be a sham transaction, designed to route something through the tax power that you suddenly realized you can't get through the commerce clause.  But more to the point, it wouldn't even be part of the income tax--in which I have said it is a legitimate function to account for expenses, as well as income. To actually make it look like a penalty, it would have to be a head tax, which goes outside the 16th amendment into bizarre areas of the constitution where AFAIK we haven't really ventured since the 19th century.  And there's no reason to have a head tax rebated for buying health insurance.

Worse, if you could manage to work it into the income tax, it wouldn't even work that well.   Getting $750 out of someone with a 15% marginal tax rate means creating an extra $5,000 in taxable income.  That's larger than the personal exemption, which would mean you'd have to take it out of the standard deduction, which would just encourage more people to itemize . . . it would be even more difficult if they had kids.

Furthermore, even you did find some hamfisted way to force them to pay it, the penalty would suddenly transform from a scary lump sum to about $29 a paycheck.

5)  A transaction structured as people are now claiming--economically and morally indistinguishable from a tax hike, and then a rebate--would have been vastly more expensive than what we got.  It could never have passed.  If it were just a tax credit, which you could sort of credibly have argued was really just a recognition of common expenses we all pay, it would have a) not worked well and b) been far too expensive to get the bill through Congress.  And adding a penalty, as I've discussed, wouldn't have much improved the cost, because it would have been much less of a disincentive.

Is the principal that the government should not meddle with peoples' preferences through the tax code a sound one?  Absolutely. *Should* it be a constitutional one?  I'd say so--though my understanding is that the supreme court has essentially thrown up its hands at the difficulty of disentangling regulatory side-effects from regulatory purpose.

But to stick to the constitutional principle, here, we don't need to throw up our hands.  We know that this is a penalty, and that the revenue-raising effects are largely incidental.  You know how?  Because that's what the government says it is.  Even as it is calling the thing a tax, it is admitting that the main purpose of our tax is to change behavior, not to raise money.  No one is claiming that without the $4 billion in tax revenue the penalty raises, the whole law will collapse.  But they are certainly claiming that it can't stand unless they can penalize people for failing to buy insurance.

The administration has a tougher argument in front of it than it had to, I think.  That's not to say that I'm predicting they'll lose--I think that mostly depends on whether Kennedy wants to rein in Congressional power, or defer to Obama's signature achievement.  

But it's clear to me that Congress, having decided that the constitutional challenges were so much Mickey Mouse BS, didn't give much thought to structuring this bill so that it would fit neatly within the powers that the Supreme Court has already recognized.  They just figured that ultimately, the justices would rubber stamp whatever they decided to do.  They may well be right.

All the rationales for what this is "like" designed to fit it into some current model of jurisprudence have a distinctly post-hoc flavor.   

Isn't this all just quibbling, though?  Does anyone really care whether these things fit some arbitrary form?

Well, yeah.  First of all because process matters, and second of all because the limits in the tax code that might prevent the government from enacting this particular mandate through its taxing powers, also prevent the government from doing other things you mighten't like.  

Think of it this way:  say the government offers to sell you a heavily subsidized house for $5,000.  Now, say the government seizes your house through eminent domain--but allows you to buy a "remittance" from the seizure for $5,000.  Economically, these are the same transaction.  And in principal, I might object to both of them.  But they are not morally or legally equivalent, for reasons I hope I don't have to explain.


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