June 29, 2012

Individual Mandate: Tax or Penalty?

Source: Wikipedia
The dissent in the ACA Supreme Court case advances the following arguments against the majority's ruling that the penalty for non-compliance with the Individual Mandate is, for Constitutional purposes, a tax:
"Against the mountain of evidence that the minimum coverage requirement is what the statute calls it—a requirement—and that the penalty for its violation is what the statute calls it—a penalty—the Government brings forward the flimsiest of indications to the contrary. It notes that '[t]he minimum coverage provision amends the Internal Revenue Code to provide that a non-exempted individual . . . will owe a monetary penalty, in addition to the income tax itself,' and that '[t]he [Internal RevenueService (IRS)] will assess and collect the penalty in the same manner as assessable penalties under the Internal Revenue Code.' The manner of collection could perhaps suggest a tax if IRS penalty-collection were unheard-of or rare. It is not.
"The last of the feeble arguments in favor of petitioners that we will address is the contention that what this statute repeatedly calls a penalty is in fact a tax because it contains no scienter requirement. The presence of such a requirement suggests a penalty—though one can imagine a tax imposed only on willful action; but the absence of such a requirement does not suggest a tax. Penalties for absolute-liability offenses are commonplace. And where a statute is silent as to scienter, we traditionally presume a mens rea requirement if the statute imposes a 'severe penalty.' Staples v. United States, 511 U. S. 600, 618 (1994). Since we have an entire jurisprudence addressing when it is that a scienter requirement should be inferred from a penalty, it is quite illogical to suggest that a penalty is not a penalty for want of an express scienter requirement.

"And the nail in the coffin is that the mandate and penalty are located in Title I of the Act, its operative core, rather than where a tax would be found—in Title IX, containing the Act’s 'Revenue Provisions.' In sum, 'the terms of [the] act rende[r] it unavoidable,' Parsons v. Bedford, 3 Pet. 433, 448 (1830), that Congress imposed a regulatory penalty, not a tax.

"For all these reasons, to say that the Individual Mandate merely imposes a tax is not to interpret the statute but to rewrite it. Judicial tax-writing is particularly troubling. Taxes have never been popular, see, e.g., Stamp Actof 1765, and in part for that reason, the Constitution requires tax increases to originate in the House of Representatives."
So, in plain English, the dissent says the penalty is not a tax, because:
  1. It is called a penalty in the statute. 
  2. The fact that the IRS collects it does not make it a tax, because the IRS collects other monies that are also described as penalties. 
  3. Just because the statute does not explicitly exempt those ignorant of this law from having to pay additional money to the IRS if they don't have health insurance, doesn't mean the penalty is a tax. 
  4. The penalty is not in the part of the statute where a tax "should" be.
I'll accept that the dissent's third criticism is valid, since I'm no lawyer and this requires a pretty heavy understanding of legal precedent. However, the other three criticism all center on nomenclature -- the definition of a tax vs. a penalty. The underlying logic of the first and fourth criticisms imply that a thing is whatever a statute calls it, not what it actually is based on its characteristics. (I cannot believe that anyone would argue that if a law calls a duck an alligator, then for Constitutional purposes it's an alligator.) The problem with the second is its implication that since penalties have never been acknowledged as taxes before, they cannot be acknowledged as such now.

It is very clear from this decision (and from the dissent) that there is no clean, clear, and unambiguous definitions for a tax vs. a penalty. It would behoove the Federal government to provide such definitions so that these judicial judgments are unnecessary.