The US Constitution however supplies a precondition to the assertion of federal authority to impose taxes on an individual. It must be characterizable in some way as income. When the government taxes nearly every dime, but for a tiny standard deduction that is far below the cost to live, it can then enact a dizzying array of deductions. They distort (for good or evil) the economy through such intervention. Taxpayer units (yeah, a person or family) that are on the cusp of the poverty line are not manipulatable by deductions alone because they are preoccupied by a financial planning horizon that is hardly any longer than a month or two. It is to this class that the imposition of tax/penalty/fine is directed.

The Baucus bill tries to finesse the legal problem, not by imposing a tax on the income of a taxpayer unit on the cusp of the poverty line but by merely having the IRS act as enforcer of a fine/penalty/whatever. Even if the IRS acts a a bill collector this does not mean that the imposition of a fine is itself based on the assertion of authority to impose an income tax. The IRS routinely aids other agencies like the SBA to redirect tax refunds to cover unpaid debt.

If the folks behind FactsAboutReform.org were to collude to exclude serving any person who did not have insurance it would today be a crime. So they seek instead to have the government do the coercing in their stead. It fits the definition of coercion no matter who does the coercing and whether or not Congress exempts it from the criminal laws. The focus changes from one of economic folly to that of statutory interpretation by folks who are largely illiterate in economics. (Judge Posner is a scarce resource.)

If Mr. Baucus wants to impose a $2,400 income tax on the first $15,000 of earnings of a single parent of one he has the legal authority to do so. He can then redirect/distribute such extracted money in any other way that Congress routinely appropriates money. He would make my Senator, Ron Wyden, happy if that source of revenue were redirected exclusively to state Health Help Agencies. What does one call a Progressive that, in substance, sponsors regressive taxation?

Based on that I conclude that (a) an individual mandate is not a sumptuary law but (b) if we end will rules limiting the amount that people can choose to spend on health care, then that will be.

http://en.wikipedia.org/wiki/Sumptuary_law

Then opponents would be even more unhappy — since those who would have preferred to pay a penalty wouldn’t have that option — but they would only complain about the mandated purchase, not a “tax”.

In effect, a pure, universally implemented mandate would go beyond the function of a penalty (which may be either set at an amount intended to just offset cost-shifting externalities or at an amount intended to do that plus subsidize others) and constitute paternalism: forcing someone to make a purchase of something that, in the eyes of the individual, does not bring to him benefits worth the price (i.e., the government deciding it knows better what’s good for the individual).

Such paternalism, by the way, could also be evident in a mandate for individuals to save some particular amount of money exclusively for healthcare costs they incur at some point. Some individuals would prefer to spend that money (on non-healthcare) or save and use it for other purposes.

We agree, in theory, that it makes sense to internalize the public piece as part of the “cost shift.” I was responding to the President’s stated context that families are paying $900 a year in higher health insurance premiums due to uncompensated care, rather than the broader construct of higher premiums AND taxes (debt).

I have several thoughts based on your comment. First, I am concerned with the welfare loss if an individual mandate is enacted into law. Even using the broader $56 billion a year in uncompensated costs, the KFF numbers suggest (indirect costs aside) there is a direct welfare loss of $126 billion in increased health spending while saving $56 billion equals a $70 billion per year welfare loss.

Second, I am concerned with practice rather than theory. After 25 years working on budget, tax, health care, and pensions policy it is clear to me that the lion’s share of public sector direct uncompensated costs will not translate into health system savings. The special interests now receiving that money are powerful and unlikely to give up their baseline subsidies. The stories I could tell… Public choice economics explains rather well the associated theory to support this view.

Third, and related to the welfare loss issue, is the strong evidence that forcing the uninsured to purchase insurance will not improve population health status. There are several credible studies/estimates suggesting that we are overinsured and that the uninsured may be spending the right amount. If memory serves me correctly, the Institute for Health Improvement (http://www.ihi.org/ihi) suggests we could be spending 25% to 35% less in health care goods and services without reducing population health status. Likewise, the Rand Health Insurance Experiment conducted in the 1970s came to a similar conclusion (with a caveat on disabled uninsureds). Again, using the welfare loss construct, how does mandating the inducement of more health insurance and increased health spending make good economic sense?

The fourth is related to your chronic illness question. As a thinker, I really like this one because it is a “wicked problem”–a problem with no practical solution.

If only we could project lifetime chronic illness costs when a person reaches, say age 18. I don’t know how to do it and I’ve never seen any credible evidence that it can be reliably done. For argument sake, let’s say we could project an individuals health future based on heredity. Would we mandate charging someone more in health insurance premium because they have a genetically higher probability of chronic illness?

Beyond genetics, the CDC published some data in the late 1970s suggesting that 70% of premature deaths and just over 50% of health spending is due to behavioral and lifestyle choices. Unfortunately, the original study has disappeared from the CDC website and they haven’t updated it to my knowledge. It begs the question, should we charge 18 year olds with obese/alcoholic/drug abusing/smoking parents and grandparents higher health insurance premiums to get at the lifestyle risk?

The practical political uproar on these two theoretical solutions would be deafening.

This doesn’t even get at the supply side issue of medical breakthroughs that might reduce the cost of treatment in the future. Medical technology is generally expensive when first introduced (patent protection, etc.), but generally comes down after a couple of decades. So say I have been paying higher premiums because I am at risk for diabetes at age 57.3235661. Let’s also say I am diagnosed with diabetes at age 57.3235662 but the cost of treatment is 1/1000 the current cost of treating diabetes. Do I get a health premium rebate from my current insurer or prorated from the five insurers I have had throughout my lifetime? What if two of the six health insurers no longer exist? Do a have a cause of action in court? How does that work? Does the government create a health risk trust fund that compensates me? After being compensated by private or public sources, say I develop acute kidney disease and the expenses for that condition have increased sharply in the past year due to a new technology. Do I have to pay the insurers or government back the money they paid me?

In many domestic policy areas, economic theory rarely fits in nicely with practice. My experience is that health policy has a higher rate of theory to practice in-congruence.

I really appreciate you raising these issues in the context of the current health reform debate. Fascinating stuff!

Thank you!

Your hypothetical: perfectly enforced mandate, no cash flowing into government:

1. As shorthand among friends and geeks, sure call it a tax if you feel like it (I should note that I am not actually one of those people, but I don’t object to the usage).

2. For budget scoring purposes: not revenues and, therefore, not a tax as long as there are plenty of private options on where to buy the mandated insurance (that’s the auto insurance example). It is revenue (and therefore a tax) if the mandate forces you to buy insurance from the government.

3. Since there’s no cash going into the government, the “fine” vs. “tax” argument doesn’t apply.

Adding one more analogy, consider speeding tickets. When they are used to enforce highway laws, they are fines, not taxes. But in infamous small jurisdictions where they are used to collect money from out-of-towners — that crosses the line to being a tax.

I don’t buy into the argument that the purpose of the “tax” or penalty is intended to prevent people from abandoning their financial responsibilities. If this was the case, the President should immediately propose that the premiums paid by Medicare beneficiaries be increased. The underpayments made by the Medicare program for services provided to its beneficiaries are more than twice (in dollar amount) the underpayments (or nonpayments) attributable to the noninsured.

Indeed, this penalty or tax is not meant to punish people for not assuming their responsibilities, but rather to force the redistribution of wealth.

Rather than a split of the rationale into two components — avoiding a cost-shifting externality and a paternalism (“It’s good for you whether you realize it or not”) — I see three components, with the the externality part divided between avoidance of what I’d call the “active externality” of the cost-shifting when someone without insurance gets healthcare and others pay for it, and avoidance of the “passive externality” of individuals without insurance making it impossible for everyone else to have the financial security of knowing that, at any given point in their lives, a pre-existing condition will not make it impossible or prohibitively expensive for them to purchase health insurance (see my comment upthread about how, without a mandate, we can’t impose on insurance companies [without blowing up their business model] guaranteed issue and prohibition of exclusions or higher premiums for those with pre-existing conditions).

I see avoidance of this “passive externality” as distinct from a subsidy by lower-cost individuals of higher-cost individuals, since what I’m speaking of is a policy that lowers risk for all regardless of each person’s or each segment’s healthcare cost level or risk profile.