Is It a "Tax," a "Penalty," or Perhaps an "Incentive?"

A blog about business and economics.
July 5 2012 8:32 AM

Is It a "Tax," a "Penalty," or Perhaps an "Incentive?"

In the wake of the Supreme Court upholding the Affordable Care Act. we've been treated to a great National Week of Pretending in which folks act as if semantic hairsplitting over whether something is a penalty or a tax is going to move voters or says anything about the merits of the policy. I think Mitt Romney probably explained this best back in 2010 when he was saying that the presence of an individual mandate is one of the things he (at the time) liked about Obamacare and described the provision in question as an "incentive":

In terms of the economics, that's the point. The idea is that if you adopt a "guaranteed issue" law (i.e. insurance companies can't turn you away because you're sick) along with a "community rating" law (i.e. insurance companies can't engage in massive price discrimination against sick people), then you're faced with the problem that nobody's going to buy insurance until they're already sick. To close the circle there has to be a financial incentive for a nonsick person to nonetheless carry an insurance plan and be part of the risk pool.

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The incentive could be a tax. Or it could be a fine. In principle it could be something nonfinancial, like the president could show up at your house and punch you in the face if you don't step up. In Massachusetts the dollars and cents of the incentive are actually pretty weak, and the policy seems to be working in part simply through norms, moral suasion, and the fact that lots of people have weak math skills. But in policy terms, what's going on is an effort to incentivize insurance purchasing in a guaranteed-issue world rather than an effort to raise revenue.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.