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A Penalty or a Tax? It’s Both

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Is the “individual mandate” in President Barack Obama’s health-care law a penalty, or is it a tax? Through a series of comic accidents, this has become the most important question facing our nation.

When designing the legislation that became the Affordable Care Act, the president borrowed what had been the central idea of Republican health-care-reform proposals in the early 1990s, as well as the central idea of Governor Mitt Romney’s health- care reform in Massachusetts. This was a requirement that almost every adult American either carry insurance or pay a fine. The Obama folks were eager to categorize this fine as a penalty, not a tax, because he had promised not to raise taxes on people earning less than $200,000 ($250,000 for a couple).

Nevertheless, Obama’s lawyers, in defending the individual mandate before the Supreme Court against charges that it exceeded the federal government’s powers under the Commerce Clause, did argue in the alternative that the mandate could be justified under the federal government’s taxing powers. Chief Justice John Roberts surprised everybody by agreeing with the law’s opponents about the Commerce Clause, but buying the administration’s view about the taxing power. Joining with the court’s four liberal justices, he thus provided the fifth vote to uphold the law.

This was a great victory for Obama, although its implications are more ominous. The conservative argument is that Obamacare -- and who knows what other laws, many of them far older and more established -- exceed the federal government’s authority under the Commerce Clause. Five members of the court (Roberts plus the four conservative dissenters who would have invalidated the law) now agree with this premise.

The decision also seemed to put the administration in a box. Is the individual mandate a tax? If so, Obama is conceding that he raised taxes on the middle class. If not, then Obama is suggesting that the Supreme Court was wrong, even though it went his way.

This is nothing, though, compared with the knots the Republicans and their presumptive presidential nominee have tied themselves into over this issue. Romney said immediately after the Supreme Court ruling that he disagreed: The mandate is not a tax. That’s because an almost identical penalty is part of his Massachusetts health-care reform -- and because, if it’s a tax, the Supreme Court was correct in declaring the law constitutional.

Then, as usual when he finds himself singing a different melody than the far right, Romney changed his tune. The mandate is indeed a tax, he agreed last week, because the Supreme Court says so, and it gets the last word. It is convenient for Romney to say that the Supreme Court has ruled and so his hands are tied. As Josh Barro points out on Bloomberg View’s the Ticker blog, this is not a principle that Romney applies to other issues, such as abortion.

So is it a penalty or is it a tax? The answer is: It’s both. “Penalty” and “tax” are just words. They don’t have some kind of essence that can settle any arguments about their meanings if only it can be discovered. Both words describe situations where the government demands payment from someone for something. There are penalties that clearly are not taxes, such as jail time for committing a crime, and there are taxes that are not penalties, like the Social Security or Medicare payroll taxes. Then there are penalties that are also taxes. Like the individual mandate.

However much a fee may resemble a penalty, it can still be a tax, and vice versa. Arguing about whether it is one or the other is like arguing about how many angels can dance on the head of a pin.

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