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Tax vs. Penalty



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UPDATE: My mediocre mind thinks like at least one great one, since as soon as I hit publish on this post I noticed Mario Loyola makes largely the same point, in a more straightfoward way, below.

It strikes me that we’re making both too much and too little out of the distinction.

There are three separate questions that get conflated:

1) What is the purpose of the individual mandate? What is it primarily intended to do? Raise revenue or compel behavior?

2) What is the function of the individual mandate? How will it actually operate once put into effect?

3) Under which of the enumerated powers — if any — is it constitutional? The taxing power or the regulatory power under the Commerce Clause?

Take the first two questions: Purpose and function are different things. If I use my old sneaker solely to kill cockroaches, its function is that of an insecticide, but its purpose — the reason it came to be — remains the covering and protecting of feet. So it could well be the case that the purpose of the mandate is to compel behavior, but that it will function — if millions elect to pay it rather than obtain insurance — primarily as a tax. The answer to both questions (1) and (2) are somewhat complex, and would necessarily rely on a mix of empirical data, mind-reading, and interpretation.

And of course, the answer to the third question is itself quite complex (just reread the Roberts and dissenting opinions if you don’t believe me) and depends on the answers to the first two.

The conflation of these questions, and the complexity involved in answering them, help explain the muddle made by both the Obama administration and the Romney campaign in the aftermath of the decision. But I think Governor Christie has come up with a way to square the circle that is as elegant as it is obvious. Here, at about 3:20, Christie offers his answer to the penalty/tax debate: “It’s both.”

That strikes me as highly plausible. Indeed, here are the four dissenters quoting an earlier SCOTUS case on the distinction:

“‘[A] tax is an enforced contribution to provide for the support of government; a penalty . . . is an exaction imposed by statute as punishment for an unlawful act.’”

Certainly the mandate has features that match both descriptions. Certainly Congress’s purpose in enacting the mandate was both to raise revenue “for the support of the government” and to provide “an exaction . . . as punishment” for self-insurance. And certainly it will do both once (if) it takes effect.

This raises a weird constitutional question (to which, perhaps, a lawyer-type has an answer he can provide in the comments): If the mandate is, purposively and functionally, both a tax and a penalty, then why does it not have to pass constitutional muster on both scores? Why is it enough that it (dubiously) skates by on the taxing power alone? Chief Justice Roberts is perhaps getting at this question, at least obliquely, when he writes that “Our precedent demonstrates that Congress had the power to impose the exaction in §5000A under the taxing power, and that §5000A need not be read to do more than impose a tax. That is sufficient to sustain it.”

But it’s not at all clear why it “need not be read to do more than impose a tax.” Roberts reasoning in the opinion relied on a deferential standard of statutory interpretation by which, if a statute can be plausibly read two ways, the Court ought to read it in the way that saves its from unconstitutionality. But that only seems to apply if the question is whether the mandate is a tax or a penalty, not whether it is a tax and a penalty. On the latter, even the ironclad establishment of the mandate’s constitutionality under the taxing power wouldn’t be “sufficient to sustain it,” but merely necessary to sustain it.



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