Mandate equivalence (or why everyone is wrong)

Consider the following two policy options:

  • Option A: You are required to buy health insurance.  If you do not, you must pay a penalty of X dollars.
  • Option B: Everyone’s taxes are raised by X dollars.  If you have health insurance, you get a tax rebate of X dollars.

How are these options different? In simple economic terms, they are functionally equivalent.  The only significant difference is that under option A, the non-insured are effectively lawbreakers.  Under option B, they are not.  Being a classified as a lawbreaker may have a range of implications on a person’s later life.

In recent months, many people have gotten all worked up about the mandate aspect of Option A.  But if you are someone who would not be insured otherwise, both options A and B have the effect of either mandating that you pay X dollars to the government or mandating that you buy insurance.  Both policy options are mandates that are, in dollar terms, equivalent (though A has the additional stigma of being a lawbreaker).

I see no reason to get any more worked up by the mandate in option A than the mandate in option B.  And the problem is those with an anti-mandate fetish get diverted from focusing on issues that really matter, such as the fact that ObamaCare is lousy policy for so many other reasons besides the mandate (which actually has some upsides as well).

Now we have Chief Justice saying that, since the two options are functionally equivalent, we might as well call them both taxes.  He understands the equivalence between options but does not seem to understand the larger implications of his decision.  In an attempt to preserve some limited scope for the commerce clause, he has essentially rendered it superfluous.  If everything can be cast as a tax (which a clever economist can always do), and government’s power to tax is unconstrained, then the commerce clause is irrelevant.

Which brings us to the question of real import: what should the government do in terms of changing the provision of health insurance?  That is what the debate should be over, not what type of policy tool the government uses to coerce us to pay for it.

Addendum: Richard Epstein summarizes things nicely (as usual): “Chief Justice Roberts has ignored this fundamental principle: If direct regulation is beyond the scope of the Commerce Clause (as he held), then taxation as an indirect route to the same regulation should be off limits as well (as he failed to hold). This is a baby that should not be split. His attempt to do so undermines his ruling, the court and the Constitution.”

9 thoughts on “Mandate equivalence (or why everyone is wrong)

    1. Huh? I wouldn’t be at all surprised if Mankiw said something similar. Indeed, many economists would see the issue exactly this way.

  1. The ACA is Constitutional because it is a tax. Just as Social Security is Constitutional because it also is a tax. Both being taxes,and the funds paid out as benefits,at any time Congress can end both programs by super majority vote or majority vote with no Presidential veto. Any people relying on Social Security or government medical aid are out of luck. Is it any wonder that,being a tax, enforcement of compliance with the ACA is overseen by the IRS. As long as a citizen posses a Social Security number(voluntary) and files W2,W4,1099 and or 1040 forms or other tax forms(all voluntary),then that citizen is legally deemed by the government to be a taxpayer and thus liable towards all the rules and regulations that the IRS imposes. If a rule or regulation says that an individual citizen must purchase health insurance then so be it. In essence its all voluntary. And being voluntary means that it passes Constitutional muster. No ifs ands or buts. In the end,the Constitution is sitting on a shelf somewhere gathering dust and has been replaced by the Social Security number. In essence we are all walking corporations under the jurisdiction of the IRS. And its all voluntary.

  2. Will Wilkinson also made this point a few weeks ago. It’s obviously true, and yet the implications for me are to get worked up about both of them equally, esp. given the size of the “tax credit” involved. After all, one of the reasons we’re in this mess to begin with is the employer tax deduction for insurance.

  3. The upside, to me at least, is that the law as it stands will effectively destroy the current health insurance regime and give us a clean slate to start in another direction.

    My wife and I were doing the arithmetic on the ACA penalty tax regime versus the status quo. We figured we would be better off paying the penalty and foregoing our current seven thousand in premium with the attendant two thousand dollar deductible. It’s that simple, pay a mere $2300 in penalties and then we pay cash until we get really sick. At that point, we sign up for insurance since we are guaranteed issue. We will save tens of thousands of dollars over the years.

    For Employers, the arithmetic is just as simple. It will be cheaper to pay the penalty than to provide insurance to employees. I don’t see how any rational economic actor would possibly buy insurance before they need it since the penalty is way cheaper than the premium.

    That leaves the health insurance carriers with a risk pool of applicants who are already sick and whom they must accept. I don’t see any reason why any of the health carriers would bother to participate in such a market.

    1. Indeed. This will turn actual health care (not health insurance—which is not the same thing) into a commons, unleashing the all-too-familiar “tragedy” dynamic. There will be little reason to restrain oneself from using the care, and it will become evident to everyone that if you don’t get it now the next guy will—and it may not be there for you next time. So your strategy, while rational, will lead to a predictable result of there not being enough to go around. And when that happens . . . .

      1. I don’t see a tragedy of the commons here. I see a lot of people opting out of insurance and choosing to pay cash. Most people can go their entire lives this way. I also see providers being forced to negotiate with buyers on services and pricing. Some would call this a market.

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