Taxes and Penalties

More about taxes, penalties, and how to tell them apart. From the majority opinion by Chief Justice Roberts:

[I]n Drexel Furniture, we focused on three practical characteristics of the so-called tax on employing child laborers that convinced us the “tax” was actually a penalty. First, the tax imposed an exceedingly heavy burden—10 percent of a company’s net income—on those who employed children, no matter how small their infraction. Second, it imposed that exaction only on those who knowingly employed underage laborers. Such scienter requirements are typical of punitive statutes, because Congress often wishes to punish only those who intentionally break the law. Third, this “tax” was enforced in part by the Department of Labor, an agency responsible for punishing violations of labor laws, not collecting revenue.

These three requirements suggest a barrier between the power to tax and the power to lay a penalty. But I would say ultimately they fail, and they fail especially in the context of penalizing inaction.

The first claim is that we distinguish penalties from taxes in that penalties are “exceedingly heavy,” while taxes are lighter. This is absurd on its face. Many penalties are minor, and some taxes are quite heavy. It may also present a problem down the road when additional instances of inaction get new taxes of their own; collectively, they may become exceedingly heavy, even if in isolation they aren’t.

The second claim is that we distinguish penalties from taxes in that penalties have to be incurred with knowledge of the facts, while taxes are incurred regardless. I understand that this is generally true in American law. The problem is that to apply it as a test is to beg the question: It might actually be the case that this payment is a penalty without a scienter requirement; imagining such things is easy enough, after all. So it might just be that the mandate is a penalty that lacks one of the safeguards we typically impose on penalties. No reason, then, that we should pat ourselves on the back.

We should rather say that in good law, a penalty often has a scienter requirement — but not that this is the case in all law, such that we could use the requirement to distinguish penalties from taxes. The very point here is to determine whether, in this case, a penalty has improperly snuck into our tax code, shorn of a scienter requirement and hoping thereby to look more like a tax.

The third claim is that if the IRS collects the payment, it is shown to be a tax rather than a penalty. This would be an invitation to abuse even if money were not fungible, although it is. A dystopian society in which the IRS collects thousands tiny taxes for failure to act according to a detailed and exacting schedule apparently isn’t unconstitutional at all. But who could possibly read the Constitution and think it did that?

Are there any limits? Roberts writes:

Congress’s ability to use its taxing power to influence conduct is not without limits. A few of our cases policed these limits aggressively, invalidating punitive exactions obviously designed to regulate behavior otherwise regarded at the time as beyond federal authority.See, e.g., United States v. Butler, 297 U. S. 1 (1936); Drexel Furniture, 259 U. S. 20.

It’s very odd to see two cites to Drexel Furniture in such rapid succession. The first is to establish (I now think doubtfully) the idea that the mandate is a tax, and second is to establish that the theory of the tax power thus implied does not give the federal government virtually unlimited authority to micromanage citizens’ lives.

It’s very odd because Drexel Furniture isn’t good law. The case struck down a federal child labor law and was later overruled.[1] It’s also odd because citing Drexel makes little sense in the context of Roberts’ larger argument, which relies on cases upholding federal taxes on marijuana and sawed-off shotguns, clearly not to collect revenue, but to direct citizens’ behavior. And on this point, Roberts agrees, and he sees no difficulties. Taxes that aim primarily to direct citizens’ behavior are fine, except for when they aren’t.

So… do I have anything better? No. I don’t. This is a really hard problem. I’m not sure it has any easy solutions.

[1] Yes, Mike Schilling, I’m happy that Drexel was overruled. I’ll spare you the trouble of asking. Please direct your question to the Chief Justice, where it may do the country some good.