Is the “shared responsibility payment” in the Affordable Care Act—the money you have to fork over to the government if you choose not to buy health insurance—a tax or a penalty? Maybe it’s both. It’s a sin tax. In fact, it’s a sin-of-omission tax.
Since the Supreme Court handed down its ruling on the ACA—rejecting the responsibility payment as a penalty but upholding it as a tax—we’ve tied ourselves in knots debating these terms. For political purposes, Democrats call the payment a penalty, while Republicans call it a tax. For constitutional purposes, Republicans portray it as a penalty, while Democrats portray it as a tax. We need a simpler model for understanding what we’re talking about. That model is sin taxes.
The court is as confused about taxes and penalties as we are. Here’s how Chief Justice John Roberts, author of the controlling opinion in the ACA case, distinguished them. Taxes, unlike penalties, entail no criminal sanctions. As long as you pay your taxes, you won’t be punished. Penalties, unlike taxes, depend on whether you knew you knew what you were doing. And penalties, unlike taxes, can be onerous to the point of destruction.
The court’s four dissenting conservatives drew the line differently: Any money the government extracts for failure to follow a legal requirement is a penalty, not a tax. They agreed that taxes have to generate revenue. But they argued, contrary to Roberts, that penalties, like taxes, can be proportionate to wealth, can apply to inadvertent violations, and can be enforced by the IRS.
In some ways, these definitions fit our intuitions about what’s a tax and what’s a penalty. In other ways, they’re a mess. Roberts’ definition of a tax seems to let the government use the tax code to push you to do whatever it wants. And the dissenters’ formulation—defining “penalty” as the sanction for “unlawful” behavior, and “unlawful” behavior as what’s punished by a “penalty”—is a useless tautology.
The political debate over these terms is less formal than the judicial debate, but it’s actually cleaner. Let’s start with the Democrats. Here’s White House press secretary Jay Carney, discussing the ACA payment on Friday:
It is not a broad-based tax. It affects 1 percent, by CBO estimates, of the population. It is not something that you assess like an income tax. … It's a penalty because you have a choice. You don’t have a choice to pay your taxes, right? … So if you don't buy [insurance], and you can afford it, it is an irresponsible thing to do to ask the rest of America’s taxpayers to pay for your care when you go to the emergency room.
That’s a pretty clear list of criteria. Unlike income or sales taxes, the payment applies only to a small subset of the population. That subset is defined by behavior, and the rationale for targeting this behavior is the financial burden it imposes on others. If you read what other Democrats have said over the past few days, you’ll see the same pattern. Here’s White House Chief of Staff Jack Lew on Fox News Sunday:
Chris Wallace: This is a tax increase on the middle class of $27 billion over the next 10 years.
Lew: No, what this is, this is a law that says if you can afford insurance and you choose not to buy it and you choose to have your health costs be a burden to others, you will pay a penalty so that you will pay your fair share. … For the 99 percent of the people who buy insurance or get it through the tax cuts that are in this act, they are not going to be affected.
Wallace cites the total figure and defines the affected population by class. Lew replies that nearly everyone is unaffected, and he defines the targeted population by behavior and burden. Gov. Martin O’Malley, D-Md., chairman of the Democratic Governors Association, delivered the same message on Face the Nation: “The ‘massive-so-called tax increase’ they`re talking about is the freeloader penalty, which would affect at most 1 percent to 2 percent of people that could afford health care and instead want to be freeloaders on the rest of us.” So did former Gov. Jennifer Granholm, D-Mich., on State of the Union: “Republicans have long gone after welfare cheats, tax cheats. Why not go after health care cheats for those who can afford health care and foist that cost on the rest of us?”
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