The chief justice’s contribution to tax reform
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.