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Call It a Penalty, Call It a Fine, Don’t Call It a Tax

Debunking the Individual Mandate ‘Tax’

SOURCE: AP/Nick Ut

Conservative Chief Justice John Roberts used a tax rationale when upholding the constitutionality of the individual mandate—and the entire law—last week. But Roberts was making a technical argument and using the word “tax” in a way that really only makes sense in an arcane legal context.

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Having lost their Supreme Court fight against the Affordable Care Act, opponents of health care reform have in recent days been attacking the individual mandate provision of the law as a “tax” on the middle class. This line of reasoning only makes sense if you think penalties for littering, speeding, or engaging in other irresponsible behavior are also “taxes.”

Yes, it’s true that conservative Chief Justice John Roberts used a tax rationale when upholding the constitutionality of the individual mandate—and the entire law—last week. But Roberts was making a technical argument and using the word “tax” in a way that really only makes sense in an arcane legal context.

First, some background: The health care law’s so-called “individual mandate” provision requires people who can afford to buy health insurance to do so, and when it’s phased in, it will assess a penalty of up to 2.5 percent of household income on those who don’t. That’s only fair, since the health care costs of the uninsured are borne by the rest of us.

You don’t need a law degree to understand the difference between a fine and a tax, and this one falls pretty neatly into the former category, as we explain below. Moreover, the vast majority of Americans—rich, poor, or middle class—will never be assessed what’s more rightly understood as the “freeloader penalty” at the center of this debate.

Still, while the tax-themed attack on the individual mandate is incoherent, it remains dangerous. Opponents of health reform well understand the power of the T-word to fire popular resentment, and will try to confuse the public about what the individual mandate is and how it works. Here are some facts to keep in mind.

Unlike taxes, this penalty is avoidable

Taxes are, for the most part, involuntary. We pay taxes on our income and when we buy things. The only way to avoid taxes is to earn less money and consume less. Penalties and fines, however, are quite different. We can avoid fines by avoiding bad behavior.

The individual mandate presents people with a choice: Either have health insurance or pay an annual penalty. The only people who will pay this penalty are those who willfully neglect to take responsibility for getting health insurance—and then stick the rest of us with the bill when they get sick or injured.

People who have health insurance will never pay the penalty

More than 80 percent of Americans today have health insurance, and the health reform law will dramatically expand coverage. When the law is fully phased in, only 6 percent of Americans will face the choice of either buying private insurance they can afford or paying a penalty, according to the Urban Institute. And only 1.2 percent of Americans will actually pay the penalty, according to congressional estimates.

Americans who can’t afford insurance will have it provided for them

Under the law, people who can’t afford to buy insurance will receive Medicaid coverage or the government will split with them the cost of buying private health insurance. Therefore, the penalty will only apply to people who can afford health insurance but would rather have taxpayers—you and me—bail them out when they need medical attention.  

The individual mandate is grounded in conservative principles of individual responsibility

The idea that people should be required to purchase health insurance if they can afford to do so was first popularized by the conservative Heritage Foundation in 1989 and first implemented in law by former Massachusetts Gov. Mitt Romney—a Republican. The idea then and today is to promote individual responsibility and to prevent self-sufficient people from relying on public assistance. “[E]ach household has the obligation, to the extent it is able, to avoid placing demands on society by protecting itself,” Heritage wrote in defense of the individual mandate.

Happily, the evidence suggests that the individual mandate penalty will apply nationwide to a small fraction of the population. Less than 1 percent of residents of Massachusetts, the only state with an individual mandate in place, were assessed the penalty in 2009.

Once the federal law takes full effect in 2014 and Americans see that the individual mandate penalty only applies to a small number of freeloaders, the antitax argument should lose all power.

It already appears to be waning in some very telling quarters. An advisor to Romney on Monday said that the presumptive GOP presidential nominee agrees with President Barack Obama that the individual mandate penalty is not a tax.

Gadi Dechter is Managing Director for Economic Policy at the Center for American Progress.

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