Taxes and Penalties


Jason Kuznicki

Jason Kuznicki is a research fellow at the Cato Institute and contributor of Cato Unbound. He's on twitter as JasonKuznicki. His interests include political theory and history.

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66 Responses

  1. Avatar Ethan Gach says:

    In this regard, isn’t it better then (read: more sane) to ask what kinds of taxes Congress is authorized to levy, rather than try to parse out the metaphysical differences between penalties and taxes?Report

    • Avatar Jason Kuznicki says:

      It might be a good thing, yes.

      But it might also have drawbacks. A large part of the early republic was financed by tariffs, but it would be awful to be locked into tariffs of the levels seen back then.Report

  2. Avatar Tom Van Dyke says:

    Lucky we passed a CONSTITUTIONAL AMENDMENT to permit the income tax, then.

    [Was I shouting there? Ooops, sorry. Must have hit the caps lock by accident.]Report

    • Avatar Jason Kuznicki says:

      Well yeah. But we didn’t need a CONSTITUTIONAL AMENDMENT to outlaw marijuana and even industrial hemp, though we did for outlawing alcohol.

      There are ships that have sailed, and there are ships that ain’t never coming back.Report

      • Avatar Tom Van Dyke says:

        The 18th Amendment was technically unnecessary, wasn’t it? All they had to do is get the Volstead Act passed and enforced.

        So too, we could put the marijuana issue to bed with a constitutional amendment, Congress shall make no law, that sort of thing, throw it back to the states.Report

  3. Avatar Tim Kowal says:

    I’ll bet SSRN is getting buried these days in requests for papers on the taxing authority.Report

  4. Avatar Tod Kelly says:

    I said this in you last post, but since I didn’t get a reply…

    What do you see as the difference between the HCR setup, and the way we have set up workers compensation? Clearly one is state and one is federal, but since the big questions post-Roberts seem to be how we define taxes, premiums and penalties, why does WC not provide precedence on at least that score?

    This is not a challenge, JK, I am really curious about your thoughts since I’m having a devil of a time parsing it all.Report

  5. Avatar Tim Kowal says:

    This question reminds me of a conversation I had with the head research attorney while externing at the state court of appeal. What makes a legal issue a “question of fact”, i.e., for the jury to decide, versus a “question of law,” i.e., for the judge to decide? In many instances, the answer is not obvious, and it is plausible to suspect that the courts arrogate power to themselves by establishing more and more issues as “questions of law.”

    That may be what has happened with the taxing authority. The tax/penalty distinction appears illusory, and that may be the point: the Court will decide each case as it will. That is simply the prerogative it has arrogated to itself.Report

  6. The case struck down a federal child labor law and was later overruled.

    I don’t believe this is correct – according to Lexis, the decision has been questioned by a district court, and some elements of it were questioned by a 4th Circuit case, but it hasn’t been technically overruled. To be sure, it’s been heavily restricted (as I noted in my earlier post), and the Court has generally abandoned the methodology of trying to discern whether the tax at issue is regulatory or revenue-raising to determine its Constitutionality, but the generalized holding remains good law, and the limits on the taxing power are still fairly well-established. In citing that case, Roberts is in effect seeking to bring that case back from the dead as a factor test of sorts, putting in place a tougher limitation than the more widely-used subsequent measure from Kahriger which has long-held that tax statutes are constitutional “unless extraneous to any tax need.”

    That is the longstanding and well-recognized standard for determining whether or not something is a tax. So far as I can tell, the dissenters did not even seek to challenge the continuing validity of the Kahriger standard – indeed, the dissent even acknowledges that “The issue is not whether Congress had the power to frame the minimum coverage provision as a tax, but whether it did so.” (emphasis in original). Why did they conclude that this was a penalty, rather than a tax? It was not because of any balancing test or examination of what the provision actually does, but because of an examination of the intent of the provision based entirely on the semantics used.

    I don’t blame them for doing this -it’s an entirely reasonable way to read the statute. But even if the dissent were to have carried the day, it would not have imposed any more or less practical limits on the taxing power than Roberts’ decision did – next time around, Congress would have been able to just get around this restriction by avoiding the imbecilic-from-the-beginning use of the word “penalty,” and, maybe, also by avoiding other unnecessary words (for purposes of the mandate provision) such as “shall” and “requirement,” which would have been no less effective if replaced by “may” and “provision.” Indeed, the critical portion of the dissent on this point is: “we have never – never– treated as a tax an exaction which faces up to the critical difference between a tax and a penalty, and explicitly denominates the exaction a ‘penalty.'” This is a debate over semantics, no more, no less, albeit an immediately important one and a reasonable one.

    The fact is that on the taxing power issue, Roberts’ decision, if anything, marginally narrows an extremely broad power, and even the dissent’s opinion would not meaningfully narrow Roberts’ language in a meaningful manner (well, outside of this case, that is).Report

    • Avatar DensityDuck says:

      Is a regulation by the executive-branch bureaucracy the equivalent of a law passed by Congress?

      If you think that those two things are different, then you shouldn’t be trying to handwave away this decision by calling it “a debate over semantics”.Report

  7. Avatar MikeSchilling says:

    Yes, Mike Schilling, I’m happy that Drexel was overruled.

    Was it? Wikipedia’s not showing me where, just saying that it was

    1. Largely mooted by states passing their own child labor laws, and
    2. Replaced by an outright prohibition when the goods the children make are used in interstate commerce. (A similar prohibition had been overturned previously in Hammer vs. Dagenhart, so presumably that was reversed.)

    By the way, I’m not sure why I was singled out for special attention.Report

    • Avatar Jason Kuznicki says:

      My understanding was that the New Deal–era court’s rulings would have encompassed this—goods destined to enter the stream of interstate commerce are very certainly subject to federal regulation. I hadn’t even bothered to look up a specific case overruling it. I just took it to be obvious.

      As to why you were singled out, please don’t play dumb. If I hadn’t said anything, you’d surely have taken some kind of cheap shot at me here, in which you pictured me pining away for the days when children’s character was formed the old-fashioned way, in a sweatshop. I know your routine by now.Report

  8. Avatar BlaiseP says:

    Nobody’s about to repeal EMTALA, the law which requires emergency rooms to treat patients regardless of their ability to pay. If Congress now insists everyone purchase some health insurance, what’s the big deal, folks? Roberts made this exceedingly clear: this is a tax on persons who will not obey the law.Report

    • Avatar Jason Kuznicki says:

      Roberts was quite clear: Congress couldn’t possibly have intended to create 4 million lawbreakers. Per his ruling, these aren’t people who “will not obey the law.”

      They’re just people who need to pay their taxes. That’s all. (I’m curious, has anyone looked into how much EMTALA costs? I’m guessing a prorated poll tax to cover it wouldn’t even come close to the amount to be raised here. It’s not a terribly expensive law.)

      I wonder what else we could command that way. Well, no. I don’t. We could command just about anything.Report

      • Avatar BlaiseP says:

        That’s all quite interesting but completely beyond the scope of this discussion. Is PPACA a law or not? Yes it is. We are obliged to purchase health insurance. If people don’t want to pay the fine, well, then my advice is to purchase some goddamn insurance. I’m a sole proprietor, nobody purchases mine.

        EMTALA costs a fortune. It’s led to the closing down of many hospitals with emergency rooms. This is what I do for a living, Jason, I do the plumbing which gets people like Dr. Saunders paid. EMTALA has led to huge market distortions: now the people who have insurance are paying for the people who don’t. Seventeen dollar aspirins. Twenty dollar boxes of tissues.Report

        • Avatar Tom Van Dyke says:

          Elephant gun instead of a flyswatter.

          The indigent won’t buy health insurance, can’t be fined by the IRS b/c they don’t make any damn money, and will continue to go to the emergency rooms.

          Arik Roy:

          The reason why Massachusetts reforms didn’t eradicate the uncompensated care problem is because only a fraction of uncompensated care is obtained by “free riders.” Many of the people who seek uncompensated care, as described above, are on Medicaid, or are exempt from the individual mandate because their income falls below 133 percent of the federal poverty level.

          Still others are uninsured because they have a pre-existing condition, and can’t gain coverage. Hence, the number of actual free-riders, who are healthy and wealthy and refusing to buy insurance, is actually 0.67 percent of national health expenditures: a rounding error.

          “Where did Congress go wrong [in calculating the cost of the “free rider” problem as $43 billion per year]? We traced its estimates of the magnitude of the hidden tax of $43 billion per year, or an increase in family premiums by an average of $1,000 per year, to two sources—the aforementioned Health Affairs study, and a non-peer-reviewed study commissioned by FamiliesUSA, a Washington, D.C., group long known for its advocacy of greater government involvement in health care. Yet Congress simply ignored the evidence in the Health Affairs study and failed to recognize the serious flaws in the FamiliesUSA analysis.

          Specifically, Congress ignored the $40 billion to $50 billion that is spent annually by charitable organizations and federal, state and local governments to reimburse doctors and hospitals for the cost of caring for the uninsured. These payments, which amount to approximately three-fourths of the cost of such care, mitigate the extent of cost shifting and reduce the magnitude of the hidden tax on private insurance.”


          The uninsured don’t even account for their fair share of health expenditures. A Kaiser Family Foundation study found that, while the uninsured made up 15 percent of KFF’s surveyed population, the uninsured accounted for only 14 percent of total ER visits, and only 12 percent of aggregate ER expenditures.

          By contrast, Medicaid beneficiaries accounted for 9 percent of the population, but 15 percent of visits and 9 percent of expenses. (For those with private insurance, the stats were 60%, 47%, and 54% respectively; for Medicare beneficiaries, 14%, 20%, and 22%.)

          Why does this happen?

          It’s pretty simple: if your health care is paid for, you are more likely to see the doctor more, and consume more tests and procedures, than if you are uninsured. Hence, people with insurance consume, on average, twice as much health care as do the uninsured.

          This problem leads to more ER crowding, poorer access to emergency care for the truly vulnerable, and more losses for hospitals. Hospitals can’t make more money on patients if they are turning those patients away due to capacity constraints. (Remember that the biggest part of how PPACA covers the uninsured is by expanding Medicaid.)

          • Avatar BlaiseP says:

            Heh. Let me tell you how this works, Tom. Just so you and your buddy Arik Roy get this straight. There’s a money run in Chicago, Cuneo to Cook County. The hospital pays to transport a GOMER from their emergency room to the public hospital, so they don’t have to admit his non-paying ass. Well, that ended when Cuneo shut down. That’s how the hospitals are coping, Tom.

            GOMER. Get Outta My Emergency Room.Report

            • Avatar Tom Van Dyke says:

              Get back to me with the math.Report

              • Avatar BlaiseP says:

                Shrug. Want the rulesets? I have 416 rules dedicated to nothing but denying health care claims.Report

              • Avatar MikeSchilling says:

                Much too complicated.

                Rule 1: if (true) { deny(); }Report

              • Avatar Snarky McSnarkSnark says:

                I once worked for an HMO that awarded a $1,000 bonus to the nurse that denied the highest dollar amount in procedures every month. The prize had no adjustments for medical need.Report

              • Avatar Tom Van Dyke says:

                We don’t need Obamacare to make this conduct a civil bad-faith tort, and with a little legislative clarity or prosecutorial initiative, a criminal offense.Report

              • Avatar Stillwater says:

                When you add up denial of claims, rescission, guarantee issue, community rating, no benefit cap, and so on you get to a pretty big problem, no?Report

              • Avatar BlaiseP says:

                But, Tom, the market will solve all our problems! Legislative clarity my ass. The health insurance industry is nothing but an unregulated bank. You deposit money, they decide if and when they’ll pay your doctor. And they hire in people like me at 90 to 120 per hour to comb through your doctor’s claim and fuck both of you over and we’ll find good reasons to give you What For, no kisses, no reach-around.

                Don’t even pretend this is a criminal offence. Their lawyers are better. They run the state health care plans for your legislators. They own Congress. Bad faith, my friend, is them telling you the Libruls are trying to load up the system with Free Riders. And Bad Thinking is you believing them. Elephant guns, indeed. If you had any idea just how fucked-up these outfits are and how much power they have in the political process and how much money they make screwing people like us, you’d be screeching like a raped ape.Report

              • Avatar Tom Van Dyke says:

                Thx for the rant and the anecdata. Cheers.Report

              • Avatar Morat20 says:

                Obviously if we deregulated the medical industry and stopped forcing all these expensive certs on doctors, and stopped all this nanny-stating FDA…*eyeroll*.

                The elephant in the room, for anyone wanting a free-market approach to health-care, is the fact that the US as a whole — both conservatives AND liberals — are simply unwilling to let doctors say “You don’t have insurance and didn’t pass a credit check” and toss them to the curb.

                Like or hate it, the American public as a whole — and I’m talking VAST majority here — will NOT accept “cash up front, insurance, or death” as your choices when having a heart attack. (Heck, just the nightmare situation of having a heart attack the day you forgot your wallet…hard to ask the unconcious dying man if he has insurance).

                Since they won’t, the free market fails. That’s not even getting into things like how inelastic health care demand is, how opaque the prices are, the massive information asymmetries and the plain fact that your aggregate health care costs from birth to death are a BIG question mark for individuals. (And not even getting into the questions about preexisting conditions).

                My job? Impossible for me to save up enough to pay for, say, a week or two in the ICU. I’d be beggared for 20 years trying to pay it off, if I had to pay in cash. I’m a bad car wreck away from landing there.

                So if I was uninsured, I’m basically gambling I won’t get hurt. But if I lose? I don’t pay the bill — I physically can’t. I’d declare bankruptcy, or just ignore it, and everyone else who got ill would pay my bill for me.

                You can’t free-market your way out of that hole. We won’t let people die if they can’t pay up front. So we might as well try to figure out the most efficient way to pay for it, because the free market ponies ain’t gonna.Report

              • Avatar DensityDuck says:

                You’re begging the question of whether “the most efficient way to pay for it” is to pass a law making not-paying-for-it illegal.Report

              • Avatar Murali says:

                Its like lefties haven’t heard of welfare transfers. If there was ever a case for welfare transfers this is one.

                But apart from that, the demand for healthcare is more elastic than you think. We don’t need second opinions all the time. Doctors in the US practice far too much defensive medicine. And the insurance mechanism itself obscures the connection between payment and consumption, which does a good job of destroying the market in healthcare.Report

              • Avatar Brandon Berg says:

                Health care prices are opaque and demand is inelastic because we don’t have a free market, not the other way around. Because most payments are made by third parties (government and insurance companies) who are legally obligated to pay the bills, consumers aren’t deterred by high prices, and in fact don’t even need to know about them at all. If we had a system where consumers paid a nonzero marginal cost for health care consumption, prices would become less opaque and demand would become inelastic.Report

              • Avatar Stillwater says:

                And the insurance mechanism itself obscures the connection between payment and consumption, which does a good job of destroying the market in healthcare.

                So the solution to our healthcare problems is to …. eliminate insurance companies?Report

              • Avatar Murali says:

                Well, if I could press a button and magically get rid of health insurance leaving only catastrophic insurance, I would. It is screwing with the whole market. The best way to do that short of declaring them illegal is to enact market reforms that phases non-catastrophic health insurance out by making it unattractive to offer except at exorbitant prices.Report

              • Avatar Morat20 says:

                (1) You won’t find me claiming ACA is the most efficient method of solving the problem.

                (2) Second opinions? Meaningless.

                (3) Opaque prices — yes, let me SHOP AROUND DURING MY HEART ATTACK. Or hey, cut rate cancer surgeries! Half off this week!

                Kinda some problems there.Report

              • Avatar Chris says:

                This is actually fairly standard for insurance companies: bonuses to the nurses and physicians who deny the most claims, or what amount to commissions based on the amount of money saved through denying claims.

                Note: they have to deny the claims for valid reasons, so it would be very difficult to make this a criminal offense without legislating what constitutes a valid reason, and once we start moving down that path…Report

        • Avatar DensityDuck says:

          “EMTALA costs a fortune. It’s led to the closing down of many hospitals with emergency rooms.”

          So the point of all this to better fund Medicaid?

          Why not just raise taxes and give Medicaid more money? Why go through all the rigamarole of “individual mandates”? Why bother calling this “healthcare reform” when it won’t actually affect the cost of anything?Report

      • Avatar Stillwater says:

        They’re just people who need to pay their taxes. That’s all.

        It’s not even that bad. There is no penalty for failing to pay the penalty tax; no liens; no garnishments. So it’s not like failure to pay other taxes. All the government can to by way of collecting it is retain that amount if the taxpayer overpays his withholding tax.Report

        • Avatar DensityDuck says:

          “There is no penalty for failing to pay the penalty tax; no liens; no garnishments.”

          (citation needed)

          And from a reputable source, please, one who’s actually going to make the decision about whether or not to punish people for failing to pay the tax. It is not relevant what someone in Congress thinks, unless they’re champion a law specifically exempting persons who don’t pay this tax from any kind of punishment.Report

          • Avatar Stillwater says:

            Here’s one: “The penalty will be paid as a federal tax liability on income tax returns and is enforced by the Treasury. Individuals that fail to pay the penalty will not be subject to criminal penalties, liens or levies.”

            BlueCross BlueShield Rhode Island:

            • Avatar DensityDuck says:

              That’s not “no penalty”. An increased fine on your taxes is not necessarily a criminal penalty.

              And, like I said, I’d prefer word from a source that makes the decision, which BCBS is not.Report

              • Avatar Stillwater says:

                Hmmm. I can’t find anything more definitive than that, and I can’t recall where I read what seemed (at the time) like a more authoritative account.

                Now I’m curious myself.Report

              • Avatar Stillwater says:

                Found it, deep in the bowels of the PPACA.

                ‘‘(g) ADMINISTRATION AND PROCEDURE.—
                ‘‘(1) IN GENERAL.—The penalty provided by this section
                shall be paid upon notice and demand by the Secretary, and
                except as provided in paragraph (2), shall be assessed and collected
                in the same manner as an assessable penalty under subchapter
                B of chapter 68.
                ‘‘(2) SPECIAL RULES.—Notwithstanding any other provision
                of law—
                ‘‘(A) WAIVER OF CRIMINAL PENALTIES.—In the case of
                any failure by a taxpayer to timely pay any penalty imposed
                by this section, such taxpayer shall not be subject to
                any criminal prosecution or penalty with respect to such
                ‘‘(B) LIMITATIONS ON LIENS AND LEVIES.—The Secretary
                shall not—
                ‘‘(i) file notice of lien with respect to any property
                of a taxpayer by reason of any failure to pay the penalty
                imposed by this section, or
                ‘‘(ii) levy on any such property with respect to
                such failure.’’.Report

              • Avatar Jason Kuznicki says:

                So I can decline to pay the penalty, then just smile and wave?Report

              • Avatar Will Truman says:


                Chapter 48, Section 5000A — Maintanence of Minimum Essential Coverage


                ‘‘(2) SPECIALRULES.—Notwithstanding any other provision
                ‘‘(A) WAIVER OF CRIMINAL PENALTIES.—In the case of
                any failure by a taxpayer to timely pay any penalty imposed
                by this section, such taxpayer shall not be subject to any
                criminal prosecution or penalty with respect to such failure.
                ‘‘(B) LIMITATIONS ON LIENS AND LEVIES.—The Secretary
                shall not—
                ‘‘(i) file notice of lien with respect to any property
                of a taxpayer by reason of any failure to pay the
                penalty imposed by this section, or
                ‘‘(ii) levy on any such property with respect to
                such failure.’’.Report

              • Avatar DensityDuck says:

                Thanks to both of you.

                Which, of course, leaves us with the question of what the hell this is supposed to accomplish…Report

              • Avatar Will Truman says:

                That’s the question we should be asking.Report

      • Avatar trizzlor says:

        I’m curious, has anyone looked into how much EMTALA costs? I’m guessing a prorated poll tax to cover it wouldn’t even come close to the amount to be raised here. It’s not a terribly expensive law.

        In 2001 EMTALA cost physicians $4.2 billion, though per-household health-care costs have gone up at least 40% since then. The health-care tax/fine is expected to raise $2.7 billion per year on average. Indeed, they are both the biggest tax hike in modern history, though one is more bigger than the other.

        I wonder what else we could command that way. Well, no. I don’t. We could command just about anything.

        Anything but all of the stuff in the Bill of Rights … and anything else that we agree to add to the Constitution … and anything that we would vote our representatives out for. But yeah, aside from the Constitution and Representative Democracy we’re ship out of luck to the tyranny of government.Report

  9. How does the fact that the amount tax/penalty depends on income? I can imagine a penalty scheme in which a certain portion of income is collected rather than an absolute and fixed amount. But I imagine that the amount of most penalties does not rely on the income of the person penalized, unless it’s a matter of discretion and the judge, or whatever, takes income into account.Report

    • Poor phrasing! What I should have said was “How does the fact that the amount tax/penalty depends on income affect whether it is a tax and not a penalty?”Report

      • Avatar Jason Kuznicki says:

        I don’t know. What do you think of this?Report

        • I wasn’t aware of the Finnish example, or the author’s call to impose it in the U.S. (assuming the author isn’t being facetious….I simply almost never read Daily Kos, so I don’t know the culture there, although I’ve been told it’s liberal/leftist).

          It’s the possibilities of penalties like that one that encouraged me to hedge with “I imagine that the amount of most penalties….” However, if most penalties–and not just the Finnish one plus a few others (preferably actually imposed in the US)–really do take income into account, outside of a judge’s discretion, then I stand corrected.

          Now, my broader point, which I did not make in my comment but did imply, is that linking amount paid to income makes something more of a tax in constitutional terms (to my mind, and income tax), might be debatable.

          As a partial aside, I think part of what’s at issue here is an equivocation between some essential distinction between “penalty” and “tax” and such a distinction for constitutional purposes. That equivocation is not the whole of the matter, I admit (for one thing, if the joint dissent is correct, case law has consistently recognized such a distinction in constitutional terms as well). But it is part of what is at issue. I personally find it easy to swallow the claim that the penalty is a tax for constitutional purposes. Others’ mileage varies.

          Finally, I will say that I really appreciate the honesty in this post, Jason. You decline to opt for the screed and the cheap shot. And even though I think I disagree overall, you raise some very interesting and hard to refute point.Report

    • Avatar DensityDuck says:

      “I can imagine a penalty scheme in which a certain portion of income is collected rather than an absolute and fixed amount. ”

      Congratulations, you’ve invented progressive taxation.Report

      • Avatar Tom Van Dyke says:

        Mr. Duck, since the “tax penalties” [whatever the words] vary by income level, you hit a vein here.Report

      • Except for almost everyone concedes that progressive income taxes are on the “tax” end of the “tax” / “penalty” spectrum. Or if it is assuming too much to say that it’s a spectrum and not a differenc-in-degree, almost everyone concedes that progressive income taxes are taxes and not penalties.Report