People have been poring over the record of Supreme Court nominee Brett Kavanaugh. This caught my eye:
Kavanaugh, in a lengthy (65 page) dissent, suggested instead that Congress intended for the AIA to apply to the mandate, because the Affordable Care Act directs that the penalty (we’re using the “p” word here instead of the “t” word) be “assessed and collected in the same manner” as a tax. The similarities, he argued, meant that it should be treated like a tax—including its applicability under the AIA. The majority disagreed with the “dissent’s linguistic analysis,” noting that the language in the statute otherwise raised distinctions.
Similar logic was used by Chief Justice John Roberts, who cast the deciding vote on the constitutionality of the ACA.
Putting aside the legal questions involved, it’s interesting to consider three different policies from an economic perspective:
1. A fully enforced regulation requiring everyone to recycle trash, with a $100/year fine for violating that regulation.
2. A $100/year tax on those who don’t use the recycle bins for their trash.
3. A $100/year subsidy to those who do recycle their trash.
To an economist, these three policies are roughly identical in terms of effect on incentives. To non-economists, there are two distinctions:
Policy #3 sounds better than policy #2. In policy #3, it seems no one is hurt and some people are helped. In policy #2, it seems no one is helped and some people are hurt. Economists understand that money doesn’t grow on trees and that a subsidy to group X is identical in effect to a tax on people who don’t belong to group X. But not everyone looks at things that way. (The tax is generally more efficient than the subsidy, in terms of minimizing the deadweight loss from the overall tax system.)
There’s also a distinction between policies #1 and #2. Non-economists view the term “rule” or “regulation” as having stronger moral implications than “tax” or “fee”. I might gladly pay a $25 parking fee in a garage in downtown Boston but be upset to get a $25 parking fine on the street, for the exact same service. (Insert Steven Wright joke after picture)
Or to take another example, some people are uncomfortable with legalizing and taxing pot, but also don’t like the idea of putting pot users in jail. Perhaps a heavy fine would be better punishment than jail, in their view, but we should keep it illegal. To them, legalization plus tax implies moral approval in a way that laws and fines do not. They see legalization as society giving its stamp of approval to an activity.
These distinctions may go back to early in life, when our parents were a sort of “government”, prohibiting certain activities. With the possible exception of the economics faculty at Chicago and George Mason universities, I doubt many parents set “taxes” on certain types of bad behavior, and allow their children to choose the “optimal level of naughtiness”.
The bottom line is that there are many ways that the government can achieve a policy objective. If the courts say that the government is not allowed to ban or mandate a certain activity, they achieve the same result via a tax or a subsidy.
READER COMMENTS
Mark Z
Jul 11 2018 at 1:39am
This is similar to an objection I have with “sin” taxes on alcohol or tobacco. We preserve the fig leaf of individual liberty by not banning them outright, but taxing certain goods more than others is effectively a partial ban. And then if you want to ban something, why not just tax it at 1,000%?
So, the rule one should want if one objects to surreptitious prohibitions, is one that forbids the state from assigning a tax or subsidy based on any sort of behavior not compelled by law.
Matthias Goergens
Jul 17 2018 at 2:15am
A partial ban on alcohol via the traditional taxes ain’t too bad: especially if you are (morally and medically) mostly worried about binge drinking and not the occasional pint.
BC
Jul 11 2018 at 5:29am
“If the courts say that the government is not allowed to ban or mandate a certain activity, they achieve the same result via a tax or a subsidy.”
Yes, but as Scott says, non-economists do not necessarily view the three options as equivalent. So, the options may not receive the same political support. Advocates of “judicial restraint” usually argue that judges should defer to democratically elected legislatures whenever possible, including construing a law in the way most likely to pass constitutional muster. Hence, Roberts recasts the penalty to a tax. However, maybe the penalty would not have passed Congress as a tax because Congress and the President wanted to claim that they weren’t raising taxes. So, this type of judicial restraint might actually be undermining voters’ wishes (to constrain policy to avoid tax hikes).
“a subsidy to group X is identical in effect to a tax on people who don’t belong to group X”
But, does the implicit tax on people not in X have the same distribution as the subsidy? For example, is need-based college financial aid equivalent to making it illegal for the poor to not go to college and enforcing that law with a steep fine? It doesn’t seem like it because the subsidy is paid for mainly by taxing the rich, who are also of course part of the non-subsidized group. It seems like the progressive income tax is equivalent to making it illegal to be rich, but the college subsidy itself does not have a penalty counterpart. At most, college subsidies make it illegal to not be part of the college-attending poor, enforced with an income-dependent penalty.
J. Avery
Jul 11 2018 at 8:43am
In real life, the options are not equivalent. In options 1 and 2, the non-conforming individual has $100 less assets after the payment. If he/she had $1,000 of ready money before, they now have $900. In option 3, the conforming individual is up $100; he/she has $1,100. While the economist might say that the relative positions of the conforming and non-conforming individual are approximately identical under each option, in the real world everyone prefers to have $1,000 if non-conforming and $1,100 if conforming, over $900/$1,000 under options 1 and 2.
artifex
Jul 11 2018 at 1:12pm
In options 1 and 2, the government has an additional $100/year revenue for each non-conforming individual. In option 3, the government has an additional $100/year expense for each conforming individual. Assume that the government does not distribute the revenue differently between conforming and non-conforming individuals, that it does not fund the expense by taxing conforming and non-conforming individuals differently, and that it is exactly as efficient in distributing its revenue as it is in funding its expenses (in reality, it is not and the subsidy is worse than the tax, which is the opposite of your conclusion). Then, once you consider the opportunity costs, the outcomes are exactly the same.
Rft42
Jul 11 2018 at 2:03pm
Doesn’t loss aversion make 2 more effective/harsher than 3, even if total economics balance out when the impact on other taxes are taken into account?
robc
Jul 11 2018 at 8:58am
Imagine if you tried to pass it that way though. No one* would support that, even though it is exactly the same thing.
*Probably not literally true, sadly
RPLong
Jul 11 2018 at 9:32am
Yes, assuming the courts or subsequent legal challenges don’t also raise issues with the tax or subsidy. Subsidies and taxes usually have to be justified within the context of a new or existing regulatory framework, and it’s not always equally easy to achieve the same results through different legal policies.
A Parent
Jul 11 2018 at 12:12pm
I doubt many parents set “taxes” on certain types of bad behavior, and allow their children to choose the “optimal level of naughtiness”
Every parent does this, and children excel at finding the equilibrium.
John Wentworth
Jul 11 2018 at 1:11pm
Seems like the more important difference between 2 vs 3 is opt-in vs opt-out. If recycling were subsidized at $100 a year, nobody would even notice. If it not-recycling were taxed, everyone would be forced to notice.
Scott Sumner
Jul 11 2018 at 1:41pm
Everyone, Recall that the money for subsidies comes from taxes. There is no free lunch. It’s best to examine these policy options from a “revenue neutral” perspective.
robc
Jul 11 2018 at 2:10pm
If we had a balanced budget requirement and a head tax, you would be exactly right. But when you can push off repayment to the next generation and have progressive taxation, for some people there is a free lunch. Its getting paid for, but not necessarily by the person eating it.
Thaomas
Jul 11 2018 at 3:07pm
Politicians may not understand the equivalence, but courts ought to. But they don’t.
For example, the Constitution Article I, Section 9, Clause 5 prohibits export taxes. but as any economist (except those inside the Trump Administration) knows a tariff on imports is equivalence to a tax on exports (the Lerner theorem). [Even Republican think tanks used to understand this. http://www.aei.org/publication/exports-and-imports-are-flip-sides-of-same-coin-therefore-a-tax-on-u-s-imports-is-a-tax-on-exports/%5D Yet courts have never ruled tariffs unconstitutional.
Another: apparently SCOTUS let corporations using their “religious liberty” decide what kind of contraception coverage its employees could have under ACA because the law makes it appear that the corporation is paying for the insurance when economist understand that insurance costs are part of employee compensation.
BC
Jul 11 2018 at 5:06pm
I wonder what would happen if Congress actually did try to pass an export tax and called it that. Under Roberts’s conception of judicial restraint, wouldn’t he have to adopt a “saving construction” that considered the export tax an import tax and, therefore, constitutional? Ha.
The contraception example actually cuts the other way. Because benefits are just part of the employees’ compensation, there is no reason to require that employers provide contraception. Employers that don’t provide contraception will have to pay employees more in cash, which employees can always use to purchase contraception coverage themselves. Employers should not have to require their employees to buy contraception as a condition of employment when the employers’ religious views prohibit them from promoting contraception. If a law required employers to require their employees to pledge fidelity to Trump, I’m sure that we would all agree that the law would be unconstitutional compelled speech and not “merely” economic regulation of employment even though, technically, the employer and not the government would be the one compelling the speech. (“Merely” in air quotes because, as these examples show, the distinction between economic liberty and fundamental liberty is a false one.)
Scott Sumner
Jul 11 2018 at 6:27pm
robc, Sure, any tax can have redistributive consequences, but that doesn’t change anything I wrote.
Thomas Sewell
Jul 11 2018 at 11:55pm
Per the SCOTUS opinions, the legal distinction between a mandate with a penalty and a tax is:
“The payment is not so high that there is really no choice but to buy health insurance; the payment is not limited to willful violations, as penalties for unlawful acts often are; and the payment is collected solely by the IRS through the normal means of taxation.”
So the opinion treated the distinction as one of degree, not of kind. If you had to pay $50K for not having insurance under the mandate, then the argument would have been that’s high enough that the purpose is obviously only to change behavior, not to raise revenue. That’s the legal difference, anyway.
So legally under that opinion, 1-2 are both taxes, because a reasonable judge wouldn’t expect $100 to convince people who object to recycle.
P.S. Pretty much any time a government requires recycling from consumers, it’s a bad idea. If the stuff was actually worth recycling, someone would pay enough for it to convince people to recycle it. That’s what we do with houses, cars, tools, jewelry, pretty much anything you can sell on Craigslist or to a pawn shop.
Scott Sumner
Jul 12 2018 at 2:55pm
Thomas, Thanks for the info. I agree about recycling.
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