Tuesday, April 24, 2012

The Taxing Power, the ACA, Religion, and Line-Drawing

-- Posted by Neil H. Buchanan

I recently watched a TV panel discussion about tax complexity, in which an economist made an interesting point about the "individual mandate" of the ACA and the sophistry of the activity/inactivity distinction.  She noted that the mortgage interest deduction -- that most sacrosanct of tax breaks -- can readily be characterized as a mandate to buy houses.  How?  If a person does not want to engage in the activity of owning a home, then that person will end up paying more in taxes than if he decides to engage in that activity.  This logic extends at least to all "tax expenditures" (that is, the tax-based government subsidies so popular among Republicans and Democrats alike), if not all tax rules more generally, because the system is set up to make taxes higher -- a tax penalty -- for those who do not take advantage of the tax-favored behavior.

Of course, this argument is not exactly new, or even all that different from many arguments that I have read elsewhere.  Indeed, as Professor Dorf wrote on Verdict after the Supreme Court's hearings in March on the ACA, Justice Sotomayor made exactly this kind of form-versus-substance argument, showing that the activity/inactivity distinction can easily be reduced to the empty phrasing that it is.  If we can recharacterize the ACA's individual mandate as nothing more than a tax cut for people who choose to buy health insurance, how in the world is it a dangerous extension of the government's scary powers to force people to do things that they would otherwise not do?

Although none of this is new, the economist's construction of the argument does seem to cut through the nonsense in a way that is better than I have seen elsewhere.  I could not help thinking about how one would construct a constitutional argument against the mortgage interest deduction.  Congress did not call the mandate a "tax."  Indeed, they called it a "tax deduction," which is (somehow) different.  Unless we force Congress to admit that it is forcing people to do things, then we are on a dangerous road to allowing them to stealthily take away our liberty.  (See how easy it is to abuse this language?)

So, to prevent Congress from abusing its power, a limitation must be derivd from the Commerce Clause, right?  And here, the argument that Congress can regulate housing is much weaker than the argument that it can regulate health care.  Although it is true that everyone must live somewhere, choosing not to live in a dwelling that one owns is not inevitable.  That is, the ACA's backers have defended the mandate on the basis that people who choose not to buy health insurance are only temporarily sitting out of a market into which they will all ultimately be forced to enter.  We will almost all end up in emergency rooms or doctors' offices at some point, and Congress has the power to set rules to make that market work better.  By contrast, people who do not buy homes might never buy homes.  Yet the mortgage interest deduction forces them to pay a penalty to stay out of that market.

There is even a decent claim (by the standards of this debate) that housing is not interstate commerce.  A person can only live in one place at a time, and if she stays in one state for her whole life, then she is not engaged in interstate commerce.  Of course, as a fan of Wickard v. Filburn, I find that fatuous, because it is easy to see how local decisions have national implications.  Again, however, the point here is that housing decisions can only be characterized as interstate commerce by reference to the effects of local decisions on home prices, mortgage rates, and so on, which affect people in other states.

All of which brings to mind another tax-based oddity of constitutional law.  As noted above, we know that tax deductions (and other tax incentives) amount to a government subsidy.  That is generally the point.  We want to make life easier for families, so we pass the Child Tax Credit, as an alternative to simply sending people a check to help cover the cost of raising children.  This means that the government is giving money to people with children.  Obviously, this logic applies equally to personal exemptions, which are a per-person subsidy received by all taxpayers.

The Supreme Court has noted that the charitable deduction also amounts to government subsidization of the tax-exempt recipients of donated funds.  If I am in the 25% income tax bracket, a $100 donation to the Church of the Fonz costs me $75, while it costs the government $25.  We approve of this subsidy by lauding the decentralized nature of the decision making.  So long as we do not subsidy extremely unacceptable behavior (such as the university rules against interracial dating in the Bob Jones University case), then each person in the country is empowered to be her own little Appropriations Committee, deciding to put some of her own money up with some government funds to support a favored charity.  Let a thousand flowers bloom!

As many have noted, of course, the uncomfortable extension of this logic is that the charitable deduction violates the Establishment Clause.  We (including, especially, the Supreme Court) look the other way when the government's tax rules allow money to be diverted from the Treasury to religious organizations.

There are surely good reasons to maintain legal fictions and to draw arbitrary lines.  For purely political reasons, polite people simply never bring up the Establishment Clause problem with the charitable deduction.  Even so, the basic logic of how taxes work -- and the ease with which one can flip back and forth between viewing any tax rule as a penalty or a benefit -- makes it utterly arbitrary to describe some tax rules as violations of liberty, while we view others as virtuous methods to encourage civic engagement.


Hashim said...

The substantive difference between a mandate to do X enforced through a "penalty" and a tax for failure to do X is that compliance is legally required in the first case but not in the second. To use your example, the mortgage deduction doesn't legally compel anyone to buy a house, but a mandate would.

Do you really not view legal compulsion as a substantive difference? Do you really think that a law that imposes a $5-per-pack "tax" on lawfully purchased cigarettes is substantively identical to a law that makes cigarettes illegal but only imposes a $5-per-pack "penalty"? It seems quite obvious to me--and CBO agrees--that fewer people would smoke under the latter law, because some people don't want to be lawbreakers, regardless of the size of the penalty.

In fact, I'm virtually certain that you agree. Federal law preempts states from banning cigarettes, but not from taxing cigarettes. Surely you don't think that the preemption analysis is identical for a state law banning cigarettes enforced through a $5-per-pack penalty and a state law that merely imposes a $5-per-pack tax.

Michael C. Dorf said...

Hashim echoes the points that Greg Katsas, for the plaintiffs, made during the oral argument on the Tax Anti-Injunction Act. Chief Justice Roberts was skeptical. As Ori Herstein's post noted, Katsas and Roberts each invoked a different conception of the nature of legal obligation. See http://www.dorfonlaw.org/2012/04/mandates-without-sanction-healthcare.html

Here I'll note two additional points by way of response to Hashim:

1) It's not really surprising that Prof. Buchanan, trained first as an economist, would side with CJ Roberts' Holmesian view that a penalty is simply a kind of price, and so absent a penalty there is no real mandate.

2) I side with Katsas and Hashim in the context of the Tax Anti Injunction Act, but that doesn't mean that the same analysis should apply to the question of the scope of Congressional power, which, after all, is Professor Buchanan's topic. There, the question is not how Congress has used the word "tax" but whether a series of incentives that could clearly be put into place under the taxing power is unconstitutional because those incentives are coupled with a command to do the thing thus incentivized or else -- or else nothing other than forgo the incentives. To my mind, the Court would need a very powerful reason to impose this formal rule as a constraint on congressional power.

Hashim said...


Set aside the metaphysical question of whether a mandate w/o *any* penalty is still a mandate, because here there is a penalty.

You don't seem to be disagreeing that a mandate w/ a $5 penalty is substantively different than a $5 tax in terms of its *effect on regulated people*, because many people want to be law-abiding citizens. Put differently, even economists should recognize that not everyone is a Holmesian, such that form has substantive effect.

And that proposition is the powerful reason to make Congress respect the proper form. If Congress has the power to tax but not to mandate, then it shouldn't be able to use a mandate because the "incentives" are indeed different for law-abiding citizens. Conversely, to the extent that there's not much difference, then it's hardly a burden to require Congress to use the proper form. In other words, forcing Congress to use a tax rather than a mandate only burdens Congress if a mandate has a different effect than a tax, which is precisely when the difference in form should be enforced.

Michael C. Dorf said...


I think I agree that IF the CC did not include the power to mandate, then the potential for different effects from a tax versus mandate-plus-penalty could provide a reason why the Court shouldn't allow Congress to use the taxing power unless it structured the requirement as a tax. But I deny the premise that the CC forbids mandates. At the very least, that is an open question--and so the fact that Congress can do NEARLY everything done by the mandate through the tax system counts as a reason not to now construe the CC as barring mandates.

In any event, I also question the premise that the effects are very different, which is why I have repeatedly said that this case is constitutionally unimportant: A new made-up rule that Congress cannot impose mandates directly and must use the tax power and say so, would not seriously constrain the power of Congress going forward. The case is important because making up such a requirement would be politically important. (I also want to be clear that I think the Court makes up stuff all the time -- sometimes for liberal ends, sometimes for conservative ones, but that one hopes those ideological ends are keyed to constitutional doctrine, not partisan politics.)

Hashim said...


That's like saying that because Congress can heavily incentivize (and even arguably coerce) States to pass or enforce laws through spending conditions, etc., it should count as a reason why Congress can directly commandeer States to pass or enforce laws. You may think that, but NY and Printz squarely foreclose such reasoning.

We'll have to agree to disagree on whether the position that not even Wickard et al. authorize purchase-mandates is a "made-up" "partisan" position, or instead a good-faith belief that purchase-mandates exceed even the expansive reasoning of Wickard and Raich, let alone the original understanding of the commerce power.

Joe said...

The first comment seems to be very artificial.

Taken as a whole, no one is "legally" compelled to have insurance unless they do not meet the exceptions. If they do, they are not penalized.

In fact, even if you don't meet the exceptions, the law precludes anything that looks like a criminal penalty. The only thing that occurs is you pay more money, money that at worse at least looks like a tax.

A very poor person breaks no "law" by not having insurance using a common sense understanding of reality here. OTOH, consider a mandate to serve in the military that is enforced by possible imprisonment. There you clearly are breaking the law. Inaction there has actual results. Reading the law as a whole doesn't change that realization.

I personally don't see either way how a "mandate" is only allowed under certain constitutional provisions. But, a reasonable understanding of the PPACA makes it not the same as the proposed $5 cigarette law. In fact, how would that be set up? Would sale be illegal too? How would that compare to the poor person w/o insurance? Encouraging the person on the idea ("selling it"?) would be aiding and abetting?

Joe said...

To add a word on the draft scenario. Let's say there is a "mandate" of registration for all. But, not coming in to register will have no effect if you are blind.

I really don't think this means the blind person is breaking the law but just not being punished for it. "Illegal" means some negative consequence.

The law has to be read as a whole. This is probably a good example of the problem of missing the forest for a tree.

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