The chief justice’s contribution to tax reform

July 11, 2012

The surprise resolution of our national healthcare drama – the mandate is a tax! – has a kernel of solace for Republican partisans saddened by the constitutionality of Obamacare: The mandate is a tax! During President Obama’s 2008 campaign, he promised not to boost taxes on anyone who makes less than $250,000. Technically, the healthcare law now defies that promise.

While the political value of that fact is questionable – Obama technically broke this pledge years ago, with a cigarette tax included in the healthcare bill, and has mostly lowered taxes on working Americans – this is a good opportunity for the president and his administration to recognize that sound policy is going to require higher taxes on everyone, even the middle class.

What’s important is that he figure out how to do it in an economically efficient way that might have a chance of attracting support from Republicans. Luckily, the careful opinion of Chief Justice John Roberts may provide a useful model of how to tax intelligently. In it, he echoes conservative intellectuals like Harvard economist Greg Mankiw and American Enterprise Institute tax expert Alan Viard, who argue that taxing consumption rather than income is smart policy, and that taxing energy is one of the best ideas of all.

Although the extremely wealthy in this country are undertaxed – particularly thanks to the bracket creep by which someone who makes $500,000 a year and someone who makes $10 million pay the same marginal rates – both the politics and the math implied by the country’s fiscal gap and its demographic challenges make it likely that the middle class will at some point see a tax increase.

Even Representative Paul Ryan’s fiscal plan, which aims to balance the federal budget by dramatically scaling back social services without raising taxes, fails to reach balance, according to the nonpartisan Congressional Budget Office. That leaves budget experts left, right and center agreeing that both tax revenues and spending cuts will be part of that Washington white whale, the bipartisan budget deal.

What does that have to do with the healthcare decision? According to the Roberts opinion, the healthcare mandate is really a tax incurred when an individual fails to purchase health insurance. While legal scholars tussle over whether taxing inactivity is a new doctrine, taxpayers are already facing such impositions with every break in the code they don’t take advantage of.

Consider the home mortgage tax deduction: Everyone who doesn’t own a home is paying more taxes than they otherwise would to subsidize all the homeowners enjoying their break. The same goes for the “charitable” deductions, by which we all pay more than we otherwise would to cover everything from the country’s churches to its super PACs, and the child tax credit, effectively a tax on those of us without progeny. Every deduction that you don’t take advantage of is essentially a tax on your inactivity. We don’t complain about that because many, though not all – I’m looking at you, mortgage deduction – of those tax breaks serve a social function we value.

Taxes are often used as a vehicle to encourage or discourage various kinds of behaviors, and tax reformers – including the next president, whoever he is – should learn from healthcare’s lessons about what kind of incentives to adopt. In the case of the healthcare tax/mandate, the idea is that getting everyone health insurance is going to save us all money in the long run, same as giving parents a tax break and subsiding civil society do-gooders. All of this contributes to a happy, growing society.

The key policy distinction between healthcare and home mortgage tax breaks, however, is that there is evidence that purchasing health insurance benefits the public – which no longer has to subsidize your emergency room visits – while subsidies for housing seem to have far fewer (and indeed many worse) consequences. If tax reform is discussed next year, it will be about controlling wild corporate lobbying and messy deals, but it will also be about how Congress can maximize the good tax breaks while eliminating the bad ones.

Economists tell us that the best tax regimes penalize negative actions – like not having healthcare insurance or buying cigarettes – while keeping the burden light on positive actions, like earning income or purchasing necessities. The healthcare tax isn’t quite a traditional consumption tax, but it comes from a similar impulse to tax bad things rather than good ones. As Mankiw puts it in a manifesto favoring these taxes [PDF], “individuals can be charged for the external costs they impose on others.” It could be an argument for the Obamacare mandate.

These kinds of taxes aren’t necessarily politically popular; they often target both entrenched interests and the populace at large. The best-known examples are the gas tax, which exists, and the carbon tax, a broader tax on fossil fuels that, in the U.S. at least, is but a flicker in the imagination of policy wonks. The Democrats’ aborted effort to create a cap-and-trade system to fight air pollution in 2009 was essentially a roundabout way of implementing a tax on pollution, but it failed in a gridlocked Congress, while facing intense opposition from the energy industry.

But in the future, consumption taxes are likely to be more popular than either jacked-up income tax rates or massive cuts to social spending. Even if global warming isn’t an accepted reality in Washington, D.C., the heat wave blanketing much of the rest of the country and the infernos of Colorado might be changing minds about the urgency needed to address climate change. A willingness to raise the gas tax, providing a much-needed funding boost to public infrastructure and helping make greener transport more competitive, would be a step in the right direction.

Indeed, like Roberts’s decision, which found a middle ground between authorizing the healthcare mandate as a necessary tool of government and obliterating it altogether, the tax policies we need to solve the country’s fiscal and other problems won’t be clear-cut partisan wins for anyone. But, like Obamacare, they’ll give us a chance for a more sustainable future.


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“… the tax policies we need to solve the country’s fiscal and other problems won’t be clear-cut partisan wins for anyone.”

The top 10% now have 75% of the wealth and 60% share less than 3%. The wealth gap has not been this bad since the Great Depression of 1929 (when the unemployment rate was also as bad). At the time there was a top tax rate of 24% and the well-to-do had so much fun they called it the Roaring 20′s. It is worth remembering that the depression was followed by tax increases to: 63%, 79%, 81%, 88% and finally to 94% in 1944.

Before the economy and the federal debt get much worse I expect my elected officials to stop the roar and save the rich from themselves. Our tax code has destroyed middle class consumers with regressive payroll taxes and each year an amount equal to all the payroll taxes is redistributed to the investment class in the form of tax expenditures. This massive redistribution of income has really been a redistribution of wealth because the well-to-do have already acquired too many assets to encourage further consumption.

We need to steer the ship away from the iceberg by eliminating payroll taxes and paying for Social Security and Medicare with a 2% net wealth tax (excluding $15,000 cash and retirement funds). That will save the middle class and most of the rich by giving middle class consumers more to spend and creating jobs and profits in the process.

We also need to really “punish” the wealthy by lowering the income tax rate to 8% and eliminating capital gains, estate and gift taxes. These changes will create the ultimate in business freedom and complement the negative reinforcement (“use it or lose it”) of the wealth tax. Businesses will have 7% more money to hire workers without payroll taxes. By enabling the “job creators” to buy and sell capital assets without being taxed and providing a 92% after tax return on investment, the new tax code would greatly help entrepreneurs and the idle rich will get what they deserve.

Completing the perfect tax reform plan would be a 4% value added tax (VAT) on business and an 8% corporate tax rate for the most competitive business rates in the world. The current 35% corporate rate would be eliminated and no longer prevent the return of foreign profits which could add trillions to domestic investment.

Imagine a sustainable economy that does not depend on government spending or tax expenditures.
Imagine a stable economy based upon broad tax bases with the lowest rates possible.

Eugene Patrick Devany, JD, MPA

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[…] nerdy musings about Obamacare, consumption taxes and the wisdom of John Roberts. Plus: My least favorite tax […]

Posted by TIM FERNHOLZ | Report as abusive

This article is far too sensible and pragmatic. Please remove it before someone sees that common sense can be used in fiscal policy

Posted by GA_Chris | Report as abusive

Too many sour grapes from folks who would fence in the U.S. economy from “outside competition”. Personally, I’d rather the average Chinese citizen make something useful to the world at large and sell it in an open market than be making bombs and bullets useful only for military adventures like the Korean Conflict. Compared to almost any other time in history, today the world is AT PEACE!

You can create any type of society you want just by how your tax system rewards and penalizes. If you look at current U.S. actions and inactions with this presumption, one must wonder “What are “our” representatives thinking?”

STOP the per-child tax tax incentives! The world doesn’t need more people. Stop the tax writeoffs for “investing” in more vacation homes and 4,000 square foot McMansions.

Provide as much birth control education and supplies to those countries that cannot feed their people for extended periods. Lace food contributed to these areas to prevent widespread starvation with effective contraception. It isn’t the responsibility of the responsible countries to subsidize endless population increases of the ignorant or the irresponsible.

It’s our responsibility to “get organized” here! America should stop non-citizens at the border who would freeload here. If their countries don’t provide free education, free school lunches, free medical (emergency) care, etc., how does that become the responsibility of Americans?

Deport ASAP those not in this country with valid paperwork whenever they are found guilty of any felony or serious misdemeanor, involved in any manner in gang activity, or driving without a valid license or insurance, or drunk. That’s what their countries do with those not there legally.

Send birth control information and supplies to those countries that cannot feed their people for extended periods. Lace “humanitarian” food with effective contraception…it isn’t the responsibility of the responsible countries to subsidize population increases in the irresponsible ones useful only for cannon fodder.

America doesn’t need more non-citizens freeloading free education, free school lunches, free medical (emergency) care. We need to deport ASAP those not in the country illegally whenever they are found guilty of any felony or serious misdemeanor, gang activity, driving without a valid license or insurance.

Once our government can show that it uses the amazing amount of tax revenue presently available efficiently and effectively, THEN we can talk about how to collect more. Until then, increasing tax revenues without effectively reducing federal wasteful practices is like trying to put out a fire with gasoline.

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