The No-Insurance Tax
|July 2, 2012||Posted by Staff under Editorials|
By a 5 to 4 decision, the U.S. Supreme Court on June 28 upheld the fine for not buying medical insurance as required by “The Patient Protection and Affordable Care Act.” The ruling is that the penalty for not having insurance constitutes a tax. Thus the Act was declared Constitutional, not under the controversial commerce clause, but under the Constitution’s tax powers, despite the President’s administration previously declaring that it was not intended as a tax. Many of the Act’s requirements will start to be implemented in 2014.
This Supreme Court is not the end of the legal challenges to the Act. It is astonishing, and yet not surprising, that the Supreme Court overlooked the Constitution’s requirements on taxation. The Constitution divided taxes into two categories: direct and indirect.
An example of an indirect levy is a sales tax. If one buys a pair of shoes, the buyer does not send his tax payment to the government. The buyer pays the tax to the seller, and then the seller makes a periodic payment of the sales tax to the government. They buyer indirectly pays the tax, making the sales tax indirect. The Constitution authorizes indirect taxes so long as the tax rate is uniform throughout the country.
A direct tax is applied to a person or his property, and is paid by the person to the government. A property tax, for example, is direct. The tax is on the owner’s property, and the owner pays it to the government. The U.S. Constitution requires direct taxes to be paid in proportion to a state’s population. For territories that are not states, such as the city of Washington in the federal District of Columbia, Congress may levy direct taxes without regard to population.
This distinction was important to the authors of the Constitution, because they wanted to link direct taxation to a state’s representation in Congress, which, for the House of Representatives, is by population. A slogan of the Revolution was, “no taxation without representation.”
The Constitution emphasized the tax distinction by stating it twice. Article I, Section 2, paragraph 3 states, “Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers …” Article I, Section 9, Paragraph 4 states, “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”
The 16th Amendment clarified that the federal income tax is indirectly on income, as the tax is on the activity of gaining income, the amount based on the gain from the activity. Whatever the merits of the legality of that argument for the income tax, the no-insurance tax is not on income, so the 16th Amendment does not apply.
Moreover, the no-insurance tax is not voluntary. It is not a true choice to order people to either buy insurance or else pay a tax. This like a robber demanding, “your money, or your life.” A contract under compulsion is not freely chosen. If the government puts you in prison, but lets you choose your cell, you have not volunteered to be in prison.
Whatever the economic or ethical merits of the insurance mandate, the tax seems direct, and so the ruling of the Supreme Court seems to be contrary to the Constitution’s requirement for direct taxes. The ruling will therefore be challenged, and the issue will go back to the Supreme Court for a determination of whether the no-insurance tax is direct. Perhaps the members of the Court recognized this, but chose to postpone the final ruling.
The president’s administration could avoid this legal challenge by making the no-insurance tax apportioned by state population. For example, California has 12 percent of the U.S. population. So 12 percent of the no-insurance tax would come from California. If there are one million adults in California with no insurance, and California’s portion of the no-insurance tax is $100 million, each adult in the state would pay $100. But if another state’s portion by population is $10 million, and it has 200,000 adults without insurance, each adult would pay $50. So the amount paid by person would depend on the portion of uninsured within the state.
That will not fly. The administration will want the no-insurance tax to be geographically uniform, so it will argue that the tax is indirect. The executive branch will argue that the tax is on non-insurance, thus not directly on the person’s wealth. Such an argument will hark back to the Hylton case of the 1790s, when the federal government imposed a tax on carriages, and the Supreme Court strangely affirmed it as not directly on the carriage property or owner.
That may carry the day, but until then, the no-insurance tax issue is not settled, and it will go back to the Supreme Court to settle the question of whether the tax is Constitutional.
Copyright 2012 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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