When is a Tax Not a Tax?

A critique–and, if you read far enough, a partial defense–of the President’s rhetoric about the definition of a tax.

Be sure to read my follow-up post: “Answer: When It’s a Fine

President Obama has walked into a rhetorical box on taxes. On the one hand, he campaigned on a promise not to raise taxes on Americans who earn less than $250,000 per year. On the other hand, he has endorsed policies that look a lot like taxes on those people. They include:

  • A $0.62 per pack increase in the federal cigarette tax. President Obama signed this into law to help finance an expansion in health programs for children; the increase went into effect on April 1.
  • Proposals to tax insurers who offer “Cadillac health insurance plans.” As many commentators have noted – and as I taught my students on Monday – some of that tax (perhaps much of it) would ultimately be passed on to consumers in higher insurance premiums. So insurers may be the ones writing checks to the government, but, in reality, consumers will be paying higher taxes.
  • Penalties to enforce an individual mandate in the health bills now pending in Congress.  For example, the draft Baucus bill (from a few days ago; it may have since changed) would impose a penalty of up to $3,800 per year for families that could afford health insurance but do not purchase it.

The President’s supporters have argued that the first two tax increases are consistent with his pledge. The increased cigarette tax, for example, isn’t an increase in income taxes.  And the tax on insurance companies isn’t a direct tax on individuals and, even if it’s partially passed through, it would not increase individual income taxes.

Such hairsplitting has no economic content – some of both tax increases really would fall on families that earn less than $250,000 – but may provide enough political cover to defend what I presume the President actually meant on the campaign trail: “I will not raise income taxes directly on American families who earn less than $250,000.”

Unfortunately for the President, that hairsplitting apparently won’t work with the third proposal which involves a direct tax on individuals who don’t get qualifying health insurance. Those individuals would have to write a check to the government as a penalty for this lack of coverage.

There would seem to be no wiggle room to enable the President to call this anything but a tax (albeit not an income tax). Yet, when asked about this by George Stephanopoulos on Sunday, the President tried to deny that such penalties are taxes. Stephanopoulos and Merriam-Webster, however, were having none of it:

The President’s argument fails, on its face, if you take the view that a tax is any money that the government takes from you through exercise of its sovereign power. Purchasing a souvenir at a National Park? Not a tax since it’s a voluntary, market-like transaction. But paying a penalty because you haven’t purchased government-approved health insurance? That’s a tax. And, indeed, it is treated as such by the Congressional Budget Office in its evaluation of health proposals.

I think CBO is correct: for federal budget purposes, the penalty on the uninsured would indeed be a tax, since it reflects the exercise of the government’s sovereign power.

However, and this may surprise you, I also think the President has an important point which he tried, with only limited success, to articulate. I would describe it as follows: A well-meaning government levies taxes for two different reasons:

  • First, it levies taxes to finance the government. National defense, the court system, the social safety net, etc. all require financing. Taxes allow the government to provide those services.
  • Second, taxes are a tool to discourage behavior that is harmful to others. For example, a government may levy a tax on emissions of carbon dioxide if it worries about potential damage from climate change. In economics-speak, that’s using a tax to internalize an externality. Such taxes are often known as Pigouvian taxes – a concept made famous by Greg Mankiw’s Pigou Club which advocates for greater use of them.

From a budget / government sovereignty perspective, Pigouvian taxes are indeed taxes. The government is using its power to collect money from people and companies that engage in the taxed activity. But revenues are not the primary purpose of the policy. Instead, the goal is to solve another problem such as pollution.

The President is viewing the tax on the uninsured as a Pigouvian tax. And he’s right, at least up to a point. If an individual can afford insurance but chooses to go without it, that person may impose significant costs on other people. Why? Because they will still get health care if, for example, they are in an auto accident. Those costs will then be paid by others (e.g., by the hospital). In that sense, the uninsured individual imposes an externality on others.

And that externality only gets larger if insurance companies are forbidden to exclude new beneficiaries because of pre-existing conditions. If that regulation goes into effect (as proposed in the health bills now pending in Congress), then an uninsured person can potentially impose substantial costs on everyone else by waiting until they have an expensive chronic disease before they purchase insurance. Because they can’t be charged more for waiting to getting coverage, they would be able to pass a substantial cost burden onto other people.

The purpose of a tax on the uninsured is to prevent such cost-shifting. The tax is thus a policy tool, not primarily a way to raise new revenue. That’s the distinction that the President was trying to articulate. And it’s an important one.

Which brings us back to the rhetorical box the President has put himself in. I think the President is wrong to claim that, in essence, a Pigouvian tax isn’t a tax. It is a tax. But he’s right to draw a distinction taxes as a tool of policy and taxes as a way to raise revenue.

Just for fun, I’ve been trying to figure out whether the President can salvage his rhetoric without making the transparently-implausible claim that a tax isn’t a tax. One option would be to just say “yes it’s a tax, but it’s not an income tax.” However, the President’s remarks didn’t go in that direction.

A second approach would be to dust off an old idea from the Reagan era, and say that the tax is really a “user fee” not a tax. But I doubt that would work any better today than it did back then.

The best I could come up with is the following: “Our government needs more tax revenue. I will not raise that revenue by raising taxes on Americans earning less than $250,000.” Something along those lines (as polished by White House communicators) might be able to give the President rhetorical wiggle room for taxes that have other purposes. (Of course, the taxes also raise revenue, so this isn’t perfect.) Other ideas?

P.S. The distinction between the two types of taxes come with caveats. If the purpose of the tax is solely to avoid cost-shifting, then the magnitude of the tax should be calibrated to match that goal. If it’s higher, then the extra portion is just a revenue-raising, unqualified tax.

21 thoughts on “When is a Tax Not a Tax?”

  1. Donald,

    When I saw that exchange on This Week I noodled the semantic (and conceptual) question a bit, too.

    No one would have to pay this penalty, so no one would have to send any money to the government. One would only do so if he preferred paying the penalty to purchasing something (health insurance) that avoids/reduces this cost-shifting externality (and also brings substantial benefits to the individual). So we’re really just talking about the requirement to buy insurance from some insurer, not necessarily the government (and not even possibly the government if there is no public option), along with the option of paying this penalty if one prefers.

    Even leaving aside the benefits that health insurance brings to the purchaser and focusing only on imposing a cost on the individual to offset the cost-shifting externality, we could liken this requirement to a new regulation that (1) requires an emitter of some pollutant to purchase and use particular equipment to reduce the quantity of that pollution per unit of output, and (2) offers the polluter the option of paying a penalty instead of purchasing and using that equipment.

    That said, you raise a valid and relevant point regarding degree. If the purchase price for health insurance or the penalty is much higher than that which would be associated with this cost-shifting externality for some segment of currently uninsured, then the balance (difference between purchase price and cost that would otherwise be shifted to others) would be what I’d consider the “user fee” portion — that is, a purchase (albeit required) by the individual of something (health insurance) that provides some benefits to that individual, whether or not that individual considers those benefits worth the price. And insofar as a given segment that is forced against its will has predictably lower healthcare costs than an insurance pool it must enter at prices that are averaged out in some way with other segments with predictably higher healthcare costs, it could be said that that lower-cost segment is being forced to subsidize the higher-cost segment. One could argue that that is a tax, but it’s an imperfect argument, since regulations in general often work that way.

  2. Suppose instead that the command was not to buy insurance from another, from a government approved list, but to build a medical savings account. It would be dedicated to spending on one’s own medical care, patterned after medical savings accounts authorized today and for which folks can get income tax breaks. It would not be subject to preemptive redistribution to folks with pre-existing conditions and the like, by way of government designated insurance middlemen.

    Someone should zero in on the distinction between a mandatory medical savings account and mandatory payment to some insurance company, public or private, for-profit or non-profit. Also, a private company has a free speech right to lobby, and folks that wish to selfinsure also have a free speech right to refuse to associate with private insurance companies or to refuse to directly give money to them under government sanctioned duress.

    The cost-shifting externality justification would appear to be satisfied if the government compulsion was narrowly tailored to that rationale by requiring only that someone build and maintain a medical savings account. That is, so long as someone does not incur bills in excess of the medical savings account, or does not pay all their medical bills from any other private source.

    Individuals who selfinsure , and get taxed, can also look forward to having their anticipated Social Security payments offset by up to 25 percent to cover any unpaid tax, together with penalties and interest. It is not a tax on income (Amendment XVI) but is dreamed up out of thin air, for non-illegals-only, and can result in a future reduction in Social Security spending.

    Suppose that the government, more directly, offered to compensate medical service providers for uncompensated care. The government would then assert a claim against the individual and their anticipated Social Security payments, up to an amount that is contemplated today as a tax/penalty. One means to do this would be to prohibit the discharge of medical services debt in an individual bankruptcy petition, so as to preserve forever the government claim against Social Security payments. That would not be politically palatable, if it was presented overtly. The medical services cabal instead crafted the various bills we see today, which can achieve the same end.

    Ron Wyden, my Senator, who would divert penalty money, under his plan, to state Health Help Agencies. A state law would otherwise suffice, except for the inability of a state to tap into someone’s federal Social Security payments to secure payment from the poor, ergo, it must be a federal program so as to get that feature accomplished.

    Let’s not forget too that one of the primary reasons anyone would sign up for welfare is to get medical care, at least for their kids. That feature of welfare would appear to become superfluous given the health care reform proposals. The tax to selfinsure is a strong inducement to sign up for the new and improved welfare program.

    Picture a state Health Help Agency claiming in interest in offset against someone’s Social Security because it is part of a federal program, with a remarkable parallel to the enforcement mechanism that has been thoroughly litigated as to federally guaranteed student loans. The debt — the obligation and accounting entry — would never go away. People on the cusp of the federal poverty line would not be able to afford either the tax or the insurance, and would surely be forced to make the micro-economically wise decision to join welfare — but without any social stigma or incentive to get off of it. Like mortgage interest deductions, it would just never go away once it is created — and there would be no stigma for participating.

    My current health insurance plan is to selfinsure, and I plan to preserve that plan.

  3. Ron,

    Requiring people to essentially save up money for medical expenses doesn’t solve the problem of this cost-shifting externality (although it reduces it a bit), because there will still be plenty of people for whom medical expenses will far exceed their medical savings. That’s the whole idea of insurance — the pooling of that risk and averaging out of the cost.

    Could any excess medical costs be recovered by reductions in future Social Security payments? I suppose at least some significant portion could be in many/most cases, but I would think that the amount of recovery would be limited by the amount of Social Security benefits that could be denied without each individual future senior falling into whatever (government spending) safety net does or would exist (and remember, we cannot control today what Congress decides to provide as income support 10 or 20 or 30 or 40 years from now, so we really can’t count on, in effect, extracting compensation decades from now from people whose excess medical costs cost others in the short and medium term, even if one favors such a concept). And of course, there is the political plausibility problem that you mentioned.

    1. Ron and Brooks — This is an interesting line of thinking to go down. In theory, at least, I think the eventual idea would be that individuals must post some sort of bond that would cover both (a) catastrophic acute costs (e.g., car accident) and (b) some sort of contribution to a future insurer if the individual is found to have an expensive chronic condition (e.g., diabetes) before they start buying insurance. (I would have to do more analysis how to price the second piece, but I hope the concept makes sense.) In principle, one could post this bond unilaterally or through an insurance carrier (not necessarily a health insurer). The MSA model moves in that direction, but still allows for uncovered catastrophic costs.

      1. Donald,

        If I can press my initial point re: the applicability of the term “tax”, if the option of forgoing insurance and paying a penalty were not offered — leaving simply a requirement to purchase insurance — would you agree that the term “tax” would be inapplicable? If so, how would offering that option, and some taking that option, constitute a tax? As long as each individual can choose between purchasing insurance or paying a penalty, aren’t we really speaking of a requirement to purchase insurance rather than a tax?

    2. Ron,

      I should also add that, although I don’t know if solving the problem of pre-existing conditions is high on your priority list, if we want to mandate that health insurance companies accept anyone wishing to purchase from them (“guaranteed issue”) and prohibit them from charging higher premiums or excluding coverage based on pre-existing conditions, we have to have an individual mandate. Otherwise, people generally would forgo insurance until they expect their medical bills to exceed the premium cost, and the insurance business model blows up.

      1. Hi Brooks — I am replying in this thread to your question in the other thread. This requires more detailed thought, but I think there are at least three potential uses of tax (or a relative) to consider:

        1. Shorthand conversations among policy analysts. That world has the broadest use of the word tax. Thus, you may hear the word “tax” used for (a) higher capital requirements for banks, (b) tradeable permit systems, and (c) a host of other regulations. That’s largely shorthand, although there’s also a nice literature beginning with “Taxation by Regulation” by Posner that points out how things done by taxes can be done through regulation and, as a result, it’s sometimes useful analytically to have a broader concept of tax. I will also stipulate that this isn’t the issue for the President.

        2. Budget determinations about what’s counts as revenue (the relative of tax I was thinking of). I think this is a slam dunk. The money coming in from the penalties would be revenues and, in a budget context, it’s fine to call them taxes.

        3. The question you’re after, I think, is drawing the line between a “fine” and a “tax”. And this may indeed be the best rhetorical angle for the President: just call it a fine, not a tax. Wish I had thought of that earlier, but I was focused more on budget thinking a la (2).

        A key difference here is empirical. If a penalty applies to 99% of the relevant population (i.e., no one obeys whatever the rule is), then I think you and I would agree that it’s a tax, regardless of the name. Conversely, if a penalty hits only 1% of the relevant population (i.e., most people go along) then I think we are in your case, where the policy is really a regulatory requirement and the penalty is just a fine. Not sure where the line in between is, but I would be tempted to label it a tax before you got to 50% of the population paying it.

      2. Thanks Donald. I assume that your answer, then, is that if there were simply no option to forgo the purchase of health insurance — i.e., purchase was mandated, period — that would still constitute a “tax” even though no money goes to the government (by the broad definition of “tax” to include regulations that mandate purchases of products/services that provide benefits to the purchaser and also reduce cost-shifting externalities). So, for example, you would call a mandate for car insurance a car ownership (or car driving) “tax”.

        Is that a correct reading of your answer?

        If so, even if economists, for some purposes, apply this broad definition, do you think such a broad definition fits common usage and the conception of “taxes” among the public? I think the common (and my) conception of “taxes” would not include mandated the purchase of something that provides benefits directly to the purchaser (as an exchange, via the transaction between buyer and supplier) and/or is needed to avoid my otherwise shifting my own costs to others. I think people could certainly object to the former rationale alone on libertarian grounds — that if one doesn’t consider the benefits worth the price, government shouldn’t act paternalistically — but I think most people (and I) would see this paternalistic component (above and beyond the externality rationale) as distinct from a “tax”. I think of taxes more as money (1) the government confiscates (rather than being paid to a supplier) and (2) the government spends on products/services that are not provided in direct exchange for a payment (as opposed to a transaction between private buyer and supplier).

        Alternatively, if a mandated purchase is/were not considered a “tax”, then we’re back to the question of why offering each individual the option of forgoing the purchase and paying a penalty make the overall legislation a “tax”? You ask a good question:
        If a penalty applies to 99% of the relevant population (i.e., no one obeys whatever the rule is), then I think you and I would agree that it’s a tax, regardless of the name?

        Yes, I suppose if the mandated purchase and the penalty were designed such that 99% of people perceived the purchase as an inferior value (benefits for the price) vs. paying the penalty “price” and receiving nothing, I would say that such a system could be considered a back-door tax, but I would still say that the primary criticism of opponents should be that the purchase is an excessive mandate, not that they have to pay the penalty that they consider preferable to that purchase.

      3. Replying to Brooks 10:43pm comment:

        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.

      4. I guess if Congress/Obama had the sole objective of avoiding the charge that they are imposing a new tax, they would just require everyone to purchase health insurance, period. If anyone failed to do so, that amount would be garnished or otherwise confiscated and a purchase made for them, with the insurer chosen by some low-bid process (perhaps just the lowest set premium available, perhaps via some dynamic reverse auction a la Priceline).

        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.

    3. A single parent who’s income is on the cusp of the poverty line is not likely to be able to afford either a $1,500 fine or $2,400 in insurance premiums and would necessarily have to sign up for the welfare program to cover the cost of the premiums. It is the purchase of these premiums by other taxpayers that itself represents a cost-shifting externality. That is, the logic of trying to avoid the risk of a cost-shifting externality by proactively compelling someone to participate in an immediate cost-shifting externality is ironic, to say the least.

  4. How Significant Is the Uninsured Cost-Shift Relative to the President’s “Tax Fix?”

    Don, thanks for raising this issue. I think the relative scale of the new “tax” compared to the current cost shift “tax” for uncompensated care is the untold story of this whole debate. Here is some compelling evidence on the scale of the new health tax policy vs. the current baseline.

    First, the President’s numbers are not credible. President Obama was using data from a 2005 study conducted by liberal advocacy group Families USA in which they paid for a study that measures the uninsured cost shift to people with insurance. The study concluded the uninsured cost shift was $922 for a family policy and $341 for an individual policy. Families USA released an update this year showing cost-shifting was higher–insured people paid $1,017 more for a family policy and $368 more for an individual policy due to cost-shifting. Surprise.

    In 2008, the Kaiser Family Foundation (KFF) released a report that rigorously challenges the methodology of the Families USA study.

    KFF determined cost-shifting for the uninsured to be roughly 2.3 percent of all U.S. health care spending, with 0.5 percent coming from private insurance.

    KFF determined medical expenditures using mostly 2006 government data as follows:

    Total health spending in the U.S = 2,420 billion.

    Total amount spent on care for the uninsured ~ $56 billion

    Subtract government financing of uncompensated care ~ $43 billion or 1.7 percent.

    The remainder is a $13 billion private insurance cost shift equal to just over half a percent of total health spending.

    KFF also calculated how much more it would cost if the uninsured were required to be insured. First, KFF stated that “individual spending on health care would increase by about 70%, growing from $2,290 to $3,885 a year.” Aggregate health system wide costs would increase by $123 billion.

    Though KFF didn’t mention it, it is critically important to note that there is no evidence that this increased spending would improve the health status of the majority of the uninsured.

    So in the end, universal coverage would save a minimum of $13 billion from private health insurance plus a small share of what might be saved from the public side (though it would likely be very small due to institutional inertia). System wide health costs would increase by $123 billion for a net increase of $113 billion in new taxes. $113/$13 = 8.7x higher taxes.

    Now to be fair, KFF mentions that these are only direct costs and do not include indirect costs from the uninsured in the range of $100 billion to $200 billion a year according to Axeen and Carpenter (2008).

    Ah, this reminds me of the good old public finance concept of “statutory incidence” vs. “economic incidence” in tax policy.

    Anyone who has ever tried to estimate indirect costs should be humbled. Simply put, it is very difficult to do analytically and the net result is highly dependent on what assumptions are taken. Moreover, there is no guarantee that the indirect costs will be addressed in the design or execution of any specific health reform legislation.

    In summary, the new “tax” on the uninsured to prevent cost-shifting to private insurance that the President is talking about would be akin to a doctor administering pain medication that increases a patients current pain “nine fold” without any clinical benefit to the patient. In medicine, that would be considered malpractice.

    1. Hi Scott — Thanks for the numbers. My initial reaction is that, at least in theory, you would want to internalize not just the private piece, not the public piece as well. So that would take you to $56 billion, which is in the neighborhood (very roughly) of $1,000 per uninsured person for uncompensated care in the current system. But, as you note, there are lots of challenges calculating that.

      As noted in the post and my other comment, though, I also wonder about “uncompensated costs” arising from chronic diseases. In a perfect system, individuals would buy insurance that covers not just the cost of acute care during the year, but also any increase in chronic costs projected over a lifetime. If you believe that, there’s another tranche of “uncompensated care” to include in the calculation, I think.

  5. Just a related thought re: an individual mandate for health insurance:

    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.

  6. Don

    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.

    1. OK, I had to reach for a dictionary for this one. Well, metaphorically. Actually Google just took me to Wikipedia, from which I learn that “Sumptuary laws (from Latin sumptuariae leges) are laws that attempt to regulate habits of consumption. Black’s Law Dictionary defines them as “Laws made for the purpose of restraining luxury or extravagance, particularly against inordinate expenditures in the matter of apparel, food, furniture, etc.”[1]. Traditionally, they were laws that regulated and reinforced social hierarchies and morals through restrictions on clothing, food, and luxury expenditures. In most times and places they were ineffectual.[2]

      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.


  7. Thanks for the response, Donald. This is great stuff!

    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!

  8. I think of monopolistic rent as a tax. It is a tax on consumers. But that is an understanding drawn from ordinary economics.

    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?

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