Answer: When It’s a Fine

Readers have provided many thoughtful comments on yesterday’s post about whether we should use the word “taxes” to characterize the financial penalties that would be used to enforce an individual health insurance mandate. Based on those comments, and some further reflection, I have several additional thoughts:

  • I discovered that some people think the individual mandate itself should be characterized as a tax. I don’t agree. As long as individuals are free to choose among private insurance plans in satisfying the mandate, there is no need for the President (or anyone else) to refer to the mandate as a tax. The distinction between regulation and taxation can sometimes be blurry, but it’s still a useful distinction. And an individual mandate is clearly a form of regulation. (However, I also won’t object if opponents characterize the mandate as a tax; that’s well within the norm of political economic rhetoric on both sides of the aisle. My point is simply that proponents of the mandate don’t need to use the “t” word in characterizing it.)

Note: The situation would be different if individuals were forced to purchase a specific government insurance plan. That would be a tax. (For a related discussion, see this brief from the Congressional Budget Office that discusses how it decides whether regulations are so intrusive that the regulated activities should be reflected in the budget; as I noted in one of my first posts, that was a key issue during the debate over the Clinton health proposals.)

  • My ruminations were focused on the question of what you should call the financial penalties that would be applied to individuals who didn’t satisfy the mandate. Following the CBO, I am firmly of the belief that the resulting cash inflow to the government should be characterized as revenues.
  • Most revenues are the result of taxes, but not all. And, on reflection, it seems rhetorically defensible to refer to the penalties as “fines” rather than “taxes” if their purpose is to enforce the individual mandate and not to generate revenue. (This is similar to, but somewhat different from, my earlier thoughts about the penalty acting like a Pigouvian tax, which is what I took the President to be saying on Sunday.)

So, here’s my revised suggestion for rhetoric that the President can use next time he’s interviewed by George Stephanopoulos: “If my plan is enacted, I believe that all responsible Americans should have health insurance. If they don’t they should face a penalty because they are imposing costs on others who may have to pick up the tab for their future health costs. And that penalty is a fine, George, not a tax.”

17 thoughts on “Answer: When It’s a Fine”

  1. When is health insurance not health insurance?

    Are you familiar with Arnold Kling? Here is a brief intro from Cato-Unbound.

    Question: How many American families have proper health insurance?
    a) over 90 percent.
    b) between 80 and 90 percent.
    c) between 10 and 80 percent.
    d) less than 10 percent.

    Given that about 15 percent of American families do not have health insurance, the correct answer would appear to be (b). However, in my opinion, the correct answer is (d).
    The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small.
    Real insurance, such as fire insurance, provides protection against rare, severe risk. Real insurance is characterized by:
    – low premiums
    – infrequent claims
    – large claims
    American health insurance—including employer-provided insurance and Medicare—is the opposite. Families typically are paid claims several times per year, often for small amounts. Premiums are high—the cost of providing insulation often exceeds $10,000 per year per family. However, most families pay these premiums only indirectly, through taxes and reduced take-home pay from employers.
    Real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely. Instead, insulation reimburses even relatively low-cost services, such as a test for strep throat or a new pair of eyeglasses. Insulation pays for treatment even if it is commonplace or discretionary.

    For the rest of the article, see Insulation vs. Insurance at Cato Unbound here:

    PS Thanks for the answer to sumptuary tax question.

  2. Donald,

    Leaving aside both what the penalty should/could be called in a conceptually appropriate way and what term would fit common usage and concept of a “tax” and focusing only on what “works” politically, I’d point out that your suggested rhetoric, while perhaps fairly good, would carry the risk of backfiring for Obama (not just on the health “reform” issue, but adversely affecting his credibility and effectiveness generally) if the amount of the penalty far exceeds the aforementioned cost-shifting externality. If such is the case, opponents will quickly and loudly discredit the rationale President Obama offered for the penalty — to force those who forgo insurance to cover the cost they will impose on others (in terms of projected uncompensated healthcare cost per capita for this segment), and those who learn of this (and who are not solidly on his partisan side) will then see Obama as less credible on this issue and generally (illustrating why politics is chess, not checkers – the importance of thinking a few moves ahead and gaming it out, with apologies to any checkers Grandmasters if any exist).

    So the question in that scenario is/would be: Would Obama gain more (on this issue and generally) by fooling some of the people than he would lose by being exposed as deceptive to others.

    I would suggest to Obama the following, deliberately rationale-blending answer to Stephanopoulos’ question/challenge:

    “George, what we are doing is requiring that everyone who doesn’t already have health insurance take the financially responsible step of purchasing it from an insurer of their choice. There are two reasons for this: One is because we, as a society, want to encourage responsible financial behavior, and someone without insurance who becomes ill or has an accident quickly finds himself or herself in a terrible financial and health situation because he or she gambled and took a very big risk, and the other reason is because that uninsured person who suddenly needs and who will get healthcare that they can’t pay for (even after they go broke trying to pay for it) passes the cost to the rest of us, because the hospitals and doctors have to make up that loss by charging the rest of us more, which raises the cost of our insurance premiums and our out of pocket expenses. So, for the health and financial security of every American and to prevent them from sticking the rest of us with their medical bills, we require everyone to purchase health insurance, and if they don’t, they have to pay a penalty [or “fine”].”

    And time permitting (and why not, the dude’s the friggin’ president), I’d suggest adding:

    “And there’s another important point, George. We want to end the days of health insurance companies rejecting people who have pre-existing conditions or setting unaffordable premiums for them or excluding coverage for pre-existing conditions. This practice brings all Americans tremendous health and financial insecurity. But if we tell insurance companies they have to take and fully cover anyone at any time regardless of pre-existing conditions, but we let people choose not to buy insurance, most individuals who don’t get insurance from their employer or Medicare or Medicaid won’t purchase insurance until they expect their healthcare costs to higher than the premiums they would pay, and that makes it impossible for the insurer to cover its expenses, let alone make even a small profit. So the only way we can all have the health and financial security that comes with stopping the harmful ways that insurance companies deal with pre-existing conditions is to require than everyone come into the system by purchasing insurance.”

  3. Nope, not buying it. Whether the government says “We’re going to take your money and spend it on X as a benefit to you” (primary example Social Security) or it says “If you don’t spend money to buy X, we’re going to take that money away”, the end result is the same: I have a chunk of income that I no longer have a choice of what to spend it on, and I have a government provided (or mandated) benefit paid for by that money whether I want it or not.

    Health care mandates with a fine for non-compliance is functionally identical to a tax, so it is a tax.

    1. Jonathan,

      Let’s pretend, just for the purpose of my question, that instead of our current Social Security system we had each person’s payroll taxes going into his own private account to be drawn from in his senior years.

      (1) Would you call that mandated savings a tax?

      (2) Would you see no justification for it even if we assume that society will, in the future when this person and others in his cohort become elderly, provide a safety net — i.e., income support funded by taxpayers — for elderly people with no money with which to survive if they failed to save enough?

      (3) Do you see an externality problem and potential moral hazard in having this safety net and not mandating such saving?

      1. No, but it’s not the same. I can use SS pension funds eventually for whatever I want. On the other hand, my money that is forcibly spent on health care that I don’t want or need is gone forever.

        Should Bill Gates be forced to buy a health care policy? Surely he, if no one else, is capable of self insuring against any known medical issue.

        I certainly recognize the externality issue, but I see that as the simple result of a welfare state. You can’t have one without eventually sapping everyone’s liberty, bit by bit.

    2. Jonathan,

      I wasn’t suggesting my mandating savings hypothetical was equivalent, just, first of all, illustrating the externality, and you’ve acknowledged that, as long as we have an applicable safety net — either in my hypothetical or with cost-shifting of healthcare expenses by the uninsured to others — this exernality exists. And we aren’t about to dismantle our safety nets, whether one would like that or not.

      Secondly, even if one believes that a mandated purchase is not worth the price, he still receives some benefits from that purchase. If it’s such a bad deal in his eyes that he’d rather pay a penalty and get nothing in return, then at least part of that penalty should be regarded as an appropriate Pigovian tax to compensate others for imposing the externality (there may be another component of the penalty beyond a reasonable externality-related portion, which could be regarded, arguably, as equivalent to an ordinary tax).

      As for Bill Gates, if someone is able and willing to maintain sufficient cash reserves in a dedicated account, legally untouchable other than for healthcare expenses, to cover even catastrophic or very expensive chronic care that may become necessary, then as long as it’s not too great an administrative burden for the government to deal with such a system, I wouldn’t see a justification for imposing an insurance mandate on such a person. But only a small percentage of Americans could afford to set aside enough cash to self-insure in that way, so the Bill Gates argument seems like a straw man to me. A trickier case and tougher call is whether or not the mandate should require only minimal coverage with a very high deductible (e.g., $10,000 or $5,000). The drawbacks would be still some degree of the cost-shifting externality and an adverse selection problem for insurers (particularly if we impose on insurers “guaranteed issue” and prohibit them from rejecting applicants with pre-existing conditions or excluding related coverage, since that means most people would forgo more comprehensive coverage unless and until they thought they’d otherwise spend more out of pocket due to the deductible than they’d spend on the higher premium, thus almost guaranteeing losses for the insurer), which could cause insurers to withdraw offerings of more comprehensive individual insurance (if legally and practically possible), or go broke, or jack up premiums on more comprehensive coverage to try to compensate for the adverse selection, or try to find creative ways to screw over folks with the pre-existing conditions or enrollees in general to try to make up for this losing proposition.

  4. Donald,
    This is an interesting discussion. I know that neither of us is a lawyer, but I wonder how much this is entangled with arguments about the constitutionality of the health insurance mandate. I saw the issue raised here:
    The argument is that forcing individuals to buy health insurance is not one of the powers constitutionally granted to the federal government. Taxation is. Thus, there is a difficult choice. If you call it an excise tax, it seems to have much more constitutional legitimacy (though Rivkin and Casey don’t buy that) but it fits awkwardly with the promise not to raise taxes. If you say it has nothing to do with taxation, that the government is just mandating some consumption behavior, then you invite questions about whether our government of limited powers is allowed to do that.
    Perhaps there are lawyers reading who could weigh in.


    1. Hi Phil — I’ve wondered about this constitutional argument as well. In particular, to what extent do the plethora of regulations that already exist shed light on the legal legitimacy of an individual mandate? States, for example, have mandates for a certain amount of auto insurance. However, you don’t literally have to buy auto insurance — you could decide not to own a car. No such non-participation option exists for health care. Is that a key constitutional difference?

      1. Donald,
        Of course, the power of the states is not limited the way the federal government’s is, so they’re free to mandate all kinds of behavior. The federal government either has to link things to interstate commerce (a broad power, but a bit implausible here given the restrictions on purchasing insurance across state lines) or they have to be indirect. If I recall, the federal government was unable to mandate a drinking age of 21, but it was able to withhold highway funds from any state that did not choose to raise the age itself. That approach wouldn’t be very practical here, either; I don’t think the Obama Administration would want to push a care package through 50 state legislatures.


      2. I wondered about the interstate commerce angle. My initial thought was that it might be an easy hurdle to get over since (a) in the Northeast corridor, at least, there are millions of people who cross states lines both to work (whence they get the insurance) and to go to the doctor and (b) some plans (ERISA) are already regulated at the national level.

  5. One problem with your description is that it assumes that non-participants are simply rejecting responsibility for their own care. I’m in my late fifties; my kids are a lot younger, with lower expected costs. If you were to construct risk pools that would reflect that, their insurance rates would be a lot lower than mine. If you don’t, then they’re subsidizing me. If you mandate that they subsidize me, then (a) it doesn’t really fit your description, and (b) it sounds a lot like a tax.

    Of course, maybe they should be in different risk pools; one had a congenital heart defect with surgery as an infant, and maybe his risk of future problems is higher than it is for the others, so a risk pool for those like him would have higher insurance rates. Should they subsidize him? Maybe so, indeed I would argue that they should. But mandating that still does not fit your description, and I would say it is still a tax. (I’m not objecting to taxes for this purpose, btw; I’m just objecting to the “imposing costs on others” characterization of those who are being told they have to subsidize the costs of others, or pay a “fine” which does so…and which I would describe as a tax. Your description sounds a little too clever. Sorry.)

    1. I agree. If you want to take my construction as both rhetorically defendable (the low standard that I was aiming at) and true (a much high higher standard), you have to face that the reality that the “responsibility test” requires one or both of (a) fair pricing of the health insurance and (b) a fair level of the fine / penalty. I haven’t seen compelling evidence on (b) yet (although see the comments by Scott Nystrom on the prior post), but I wouldn’t be surprised if the numbers in play are too high.

      On (a) I think there’s a serious risk they end up with unfair prices. For example, there are proposals to limit the degree to which premiums can vary by age. That’s exactly the cross-subsidization you are worried about, and it is indeed a form of “taxation by regulation” (to borrow a phrase from Judge Posner).

  6. Scope of Congressional authority:

    Does Congress have the authority to “fine” a single parent of one $1,500 if they refuse to provide proof that they are a member of ACORN?

    Would it matter if the parent had income above the federal poverty line?

    If it is not a “tax” on income then what other provision of the US Constitution will the federal government rely upon to assert such authority?

    Congress could declare a finding that there is the Risk of some public costs for a describable group of folks that do not join ACORN and accept the services offered; services pegged to obtain some sort of other public aid, and immediately impose a cost-shifting externality. (Creating a circularity in reasoning.)

    The Congress can impose the $1,500 tax on the first $15,000 dollars of income of a single parent of one and dedicate it to ACORN. But only so long as they call the extraction a tax.

    The “fine” characterization leaves open the opportunity for an immediate court action based on free association rights, which includes the right not to associate.

    I could even purchase qualifying medical insurance but insist upon not disclosing it to the prying eyes of the government, and still be subject to the fine-or-tax. That is, I could isolate on the personal privacy issue. You could read NAACP v. Patterson for recognition of a right of an organization to refuse to disclose membership and to identify contributors. The compelled disclosure of my affiliation with a private organization, even if for insurance purposes, also fits within that recognized right. I actually find this sort of issue more intriguing.

    1. I do wonder where this line of authority is. Congress has certainly used the following authorities:

      * Levy taxes on individuals.
      * Levy fines on individuals who don’t file their taxes.
      * Force individuals to purchase catalytic converters on their cars (although the actual regulation is at the company level).
      * Force companies to do myriad things or else pay a fine.
      * Forbid individuals from buying specified products
      * Draft individuals into the armed services
      * Draft individuals into federal juries
      * Incarcerate individuals for not obeying laws

      Several of these are, arguably, at least as coercive as forcing the purchase of health insurance. But none of my examples require disclosure of an affiliation — I wonder if any of those already exist? You may be able to get out of some of these obligations by disclosure, but it isn’t forced.

      If you take these concerns seriously, perhaps one fall back is that individuals who choose not to purchase qualifying health insurance should face higher premiums if and when they choose to purchase insurance?

      1. For an illustration of the difficulty of pinning down a source of authority you might read Printz v. United States. It generated six separate opinions. This was about the Brady bill, where the federal government sought to command states to act as the functional equivalent of a federal agency regarding gun regulation. The Baucus bill suffers a similar flaw, making demands upon states. An alternative approach is used with government pension plans, where the government workers can get a deduction on their income taxes for their contributions but only so long as the plan meets certain conditions and the enforcement tool is limited to denial of tax deductibility for future employee contributions.

        Corporations are artificial entities, and there is no recognized right for any individual or collection of individuals to compel any state or the federal government to allow their formation, or further to extend the privilege of limited personal liability for the conduct of such corporations. If a state need not offer any statutory incorporation provisions then the extension of the privilege can be coupled with an almost limitless set of conditions. The typical limited personal liability feature of incorporations (with some exceptions for bank incorporations) has shielded the personal fortunes of the beneficiaries of corporations against financially harmed individuals. This is one huge bit of uncompensated liability, a cost-shifting externality. The Baucus bill could include an amendment (patterned after demands in SBA loans) that no health insurance plan will qualify unless the folks with a beneficial interest in such insurance companies pledge the entirety of their personal fortunes as collateral for the benefit of the insureds. Bank incorporations in the past did not come with limits on personal liability of the incorporators. If such a personal liability condition were placed on the qualification of the insurance companies/entities how do you suppose the corporate shills would respond?

        I had thought about a draft to serve medical needs rather than military needs. But it looks like a draft would only be authorized for the military self-defense from external threats. There is the major unaddressed supply side problem, where to give care to one person must necessarily mean taking it away from another. I haven’t heard anything about a dramatic expansion in training of medical personnel, including foreign nationals that would serve the needs of folks in their native country.

        If I do not buy insurance then the Commerce Clause authority has nothing for congress could to regulate.

        Back to corporation angle:

        If I cannot insure myself and I cannot insure my neighbor what rationale would allow me to do just that if only I were to form a corporation? Even if I waived limits on personal liability for the acts of the corporation? A corporation is after all merely a species of an association of individuals acting in the mutual self-interest of the members. If an individual does not have a right to insure themselves or to insure others then the beneficial members of any organization have no rights to confer to their organization. I am not yet willing to recognize a superior set of rights for a private corporation versus that for of any individual.

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