Credits vs. Taxes: The Constitutional Effects on the Health Care Debate

8/6/2019 Credits vs. Taxes: The Constitutional Effects on the Health Care Debate

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Advocate for freedom and justi ce2009 Massachusetts Avenue, NWWashington, DC 20036202.588.0302

Washington Legal FoundationWLF

CriticalLegalIssues:

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PAPERSERIE

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CriticalLegalIssues:

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CREDI TS VS. TAXES:

TH E CONSTITUTIONAL EFFECTS ON

TH E H EALTH CAR E R E FORM D EBATE

By

Professor Steven J. WillisNakku Chung, Esq.

W a sh in gt on L e ga l F oun da t ionCritical Legal Issues WORKING PAPERSeries

Number 176May 2011


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Copyright 2011 Washington Legal Foundation

TABLE OF CONTENTS

ABOUT WLFS LEGAL STUDIES DIVISION ......................................................... ii

ABOUT THE AUTHORS ....................................................................................... iii

I. CONSTITUTIONAL DIFFERENCES BETWEEN A CREDITAND A TAX ......................................................................................................... 4

A. Example One of a Credit Versus a Tax .................................................. 11

B. Example Two .......................................................................................... 12

C. Example Three ....................................................................................... 12

II. PROCEDURAL DIFFERENCES ...................................................................... 14

III. PRACTICAL DIFFERENCES ......................................................................... 15

IV. PSYCHOLOGICAL AND ECONOMIC DIFFERENCES ................................. 18

CONCLUSION ..................................................................................................... 20


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ABOUT THE AUTHORS

Steven J. Willis is Professor of Law at the University of Florida Levin College OfLaw.

Nakku Chung is a Member of the Florida Bar.

Willis and Chung authored a report, (Constitutional Decapitation and Healthcare, TAXNOTES, July 12, 2010, p.169, Doc 2010-11669, 2010 TNT 133-6), demonstrating thepenalty contained in the Patient Protection and Affordable Care Act is anunconstitutional Direct or Capitation tax. They also authored a viewpoint (Oy Yes, theHealthcare Penalty is Unconstitutional, TAX NOTES, Nov. 8, 2010, p. 725, Doc 2010-22113).

They thank David Koppel, Nathan Wadlinger, Joseph Malca, M. Todd Lewis, and EricPenkert for helpful advice and assistance.


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CREDITS VS.TAXES:

THE CONSTITUTIONAL EFFECTS ON

THE HEALTH CARE REFORM DEBATE

byProfessor Steven J. Willis and

Nakku Chung, Esq.

This WORKING PAPER addresses one particular issue: how a credit differs

from a tax or penalty. Some people argue the constitutional objections to the

Patient Protection and Affordable Care Act (Health Care Act or the Act) are

moot because Congress could constitutionally accomplish the same goals with

a credit for health insurance purchasers; however, such a credit would not

likely have the same substantive effects as Section 5000A the health care

penalty.

Credits differ from taxes in several ways: constitutionally, procedurally,

substantively, economically, and psychologically.

Constitutionally, credits are a form of spending, as is evident from the

CBOs annual Tax Expenditure Budget, which details the static costs of various

deductions, credits, and exclusions. The Supreme Court has also treated

credits as a form of spending, as recently as the 2011 decision in Arizona

Christian Schools. The Arizona majority distinguished credits from

appropriations for taxpayer standing purposes; however, it accepted the

general rationale that credits are not merely negative taxes subject to the


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Washington Legal Foundation 2011 Page 2

Taxing Power limitations. Limitations on the Spending Power differ significantly

from limitations on the Taxing Power.

Procedurally, credits involve a single step while the current Act involves

both a mandate and a tax or penalty. Drafting credit language to reach the

exact opposite persons those to be subsidized rather than penalized would

be a complicated drafting task. So far, no one has proposed the language.

Courts must not assume such language is feasible.

Substantively, credits and penalties or taxes reach different persons

because of their inherent natures: taxes and penalties are enforceable while

credits are voluntary. Compliance with taxes and penalties, while not

universal, differs from compliance with credits and deductions.

Economically and psychologically, credits differ profoundly from taxes

and penalties. One is a carrot while the others are sticks. People inevitably

react differently to rewards as opposed to punishment. While both are highly

motivating, they serve different purposes. The fields of economics and

psychology both study the relative effects and commonly explain how reward

and punishment are not interchangeable.

The tax expenditure analysis, while supporting the notion of credits as

spending, is flawed. Because it rests on static rather than dynamic numbers, it

provides incomplete and potentially misleading information. The Arizona

majority criticized the tax expenditure analysis underpinnings, describing them

in almost Marxist terms.


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Of the questions posed by Health Care Act supporters, perhaps the most

seductive is:

If Congress can constitutionally grant a tax creditto health

insurance purchasers, why do opponents object to apenalty or tax on non-purchasers? Economically andsubstantively, are they not the same?

For example, Professor Brian Galle1 argues for the constitutionality of the

Health Care Penalty as a tax in part by specifically citing three credits, a

deduction, and an exclusion.2 He suggests the cited provisions tax people

differently because of their failures to act; thus, he argues the Act is not an

unprecedented tax on inactivity, contrary to what others have claimed. His

error is treating credits, exclusions, and deductions as negative taxes subject

to the Taxing Power limitations. They are not; instead, credits, deductions, and

exclusions are constitutional, if at all, under the Spending Power.

Credits, deductions, exclusions, and subsidies differ profoundly from

penalties and taxes. They are not the same, constitutionally, procedurally,

practically, economically, or psychologically. Subsidizing activity is not the

same as punishing inactivity.

1Brian Galle, The Taxing Power, the Affordable Care Act, and the Limits of ConstitutionalCompromise, 120 YALE L.J.ONLINE 407 (2011), http://yalelawjournal.org/2011/4/5/galle.html.2Id. at note 73, citing I.R.C. 25A (Hope and lifetime learning credit), 25B (IRA credit), 106(exclusion for employer provided health care), 163 (interest deduction), and 901 (foreign taxcredit).


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I. CONSTITUTIONAL DIFFERENCES BETWEEN A CREDITAND A TAX

The Health Care Acts health insurance mandate is justifiable, if at all,

under the commerce clause. Arguably, it fails.3 Similarly, the penalty is

justifiable, if at all, under the Necessary and Proper clause. Again, arguably, it

fails.4

The constitutional analysis of a credit, deduction, or exclusion, however

is different. The Spending Power, arising under the General Welfare clause,5

grants Congress broad authority to spend. Congress subsidizes health care in

many ways: exclusion of health insurance benefits,6 deductibility of employer-

provided insurance,7 operation of cafeteria plans,8 favorable treatment of

3

Willis & Chung, Of Constitutional Decapitation and Healthcare, TAX NOTES, Vol. 128, No. 2,July 12, 2010 (Willis & Chung 1); Willis & Chung, Oy Yes, the Healthcare Penalty isUnconstitutional, TAX NOTES, Vol. 129, No. 6, Nov. 8, 2010 (Willis & Chung II). Of theDistrict Courts considering the issue, two have ruled against the Act on Commerce Clausegrounds and three have ruled favorably. Virginia v. Sebelius, 728 F. Supp. 2d 768, 782 (N.D. Va. 2010) (unconstitutional); Florida v. U.S., 716 F. Supp. 2d 1120, 1165 (N. D. Fla. 2011)(unconstitutional); Thomas More Law Center v. Obama, 720 F. Supp. 2d 882, 895 (E. D.Mich. 2010) (constitutional); Mead v. Holder, ___ F. Supp. 2d ___ 2011 U.S. Dist. LEXIS18592 *50 (D. D.C. 2011) (constitutional); Liberty Univ. v. Geithner, ___ F. Supp. 2d ___2010 U.S. Dist. LEXIS 125922 *39 (W. D. Va. 2010) (constitutional).4Thomas More Law Center v. Obama, (6th Cir. 2010), Brief of Steven J. Willis, UrgingReversal at 3-8.5

The Constitution does not include an enumerated Spending Power. The General WelfareClause and the Necessary and Proper Clauses, however, authorize spending. Severalclauses more specifically authorize spending. Arguably, the specific powers to support anarmy and a navy are superfluous if the less specific General Welfare clause authorizesspending for any purpose that comprises the general welfare.6I.R.C. 105, 106.7I.R.C. 162.8I.R.C. 125.


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hospitals,9 as well as through Medicaid and Medicare. Congress could provide

a tax credit to health insurance purchasers. Some such credits result in

carryovers10 or carrybacks,11 while others are refundable.12 For one year,

1982, taxpayers could effectively sell credits and other tax attributes.13

According to some, congressional spending is permissible only to fulfill

other enumerated powers,14 such as the power to regulate commerce or to tax.

If Congress can simply spend for whatever it fancies, little is left of the specific

powers to provide for post roads, or to support an army and a navy. 15 If that

view is correct, the same issues arise. For example, if the regulation of

commerce is at issue, the government would need to show how health care

spending is appropriate under that power. Admittedly, most authorities believe

federal healthcare spending is appropriate; however, not everyone concedes

9I.R.C. 501(c)(3);170(b)(1)(A(iii);509(a)(1).10I.R.C. 39(a)(1)(B).11I.R.C. 39(a)(1)(A).12I.R.C. 24(d).13Under I.R.C. 168(f)(8)(1981) safe harbor leasebacks effectively allowed the sale of taxattributes. Rather than directly subsidize taxpayers, Congress adopted a tax provision whichallowed taxpayers to transfer unused tax credits and benefits to others. See, Alvin C.Warren, Jr. and Alan J. Auerbach, Transferability of Tax Incentives and the Fiction of SafeHarbor Leasing, 95 HARV.L.REV. 1752 (1982). Congress repealed the provisions in 1983.See, Alvin C. Warren, Jr. and Alan J. Auerbach, Tax Policy and Equipment Leasing afterTEFRA, 96 HARV.L.REV. 1579 (1983). The temporary transferability of tax attributes while

at best a mixed success is consistent with their being a type of spending rather than anegative tax. See also I.R.C. sections 108 and 1017 which denominate such items as taxattributes and effectively treat them as taxpayer assets.14Robert G. Natelson, THE ORIGINAL CONSTITUTION: WHAT IT ACTUALLY SAID AND MEANT(2010) at 1568 (Kindle Ed). According to Professor Natelson, the General Welfare clausedoes not authorize spending; instead, it merely restricts the Taxing Power which providesmoney for spending authorized elsewhere.15Id. at 1606.


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the issue. Also, if the Taxing Power is at issue, the only appropriate spending

would be to support the IRS and to administer the laws. The theory would not

permit a credit under the Taxing Power to provide health care. Such a use of

the Spending Power would require commerce clause justification. In any event,

the Spending Power is not unlimited, although the restrictions are not severe.

In contrast, the Commerce Clause hasrestrictions. It has never before

applied to compel individuals to enter private contracts. Congress arguably

cannot regulate inactivity; the courts disagree on whether the lack of health

insurance is inactivity or whether it amounts to the activity of self-insurance.

Whichever is correct, everyone agrees the Commerce Clause has somelimits

and this matter involves delineating those limitations. Similarly, the Taxing

Power, or the power to assert a Commerce Clause penalty, is also limited.

Indirect taxes must be uniform.16 Direct and capitation taxes must be

apportioned.17 Income taxes must satisfy the significant Sixteenth Amendment

restrictions: they must be on income, derived from, a source. These are

not trifles.18 Of all the issues debated by the Founders, taxes and the

limitations on them were paramount.

Importantly, credits, deductions, and exclusions are forms of Spending:

they are not negative taxes. In the 2011 Arizona Christian Schoolcase, the

16U.S.CONST. ART.I,8, CL.1.17U.S.CONST. ART.I2 CL.3; ART.I8, CL. 1;18Willis and Chung I at 181-93; Willis and Chung II at 725-27.


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Supreme Court essentially described a state tax credit as a form of

expenditure.19 Congress regularly produces a tax expenditure budget

detailing the costs of each deduction, exclusion, credit, deferral, and

character determination.20 It routinely treats credits as it does direct spending.

The tax expenditure analysis dates at least to 1974 and was expressed

by several broadly respected tax professors. They spoke of a normative tax

system which taxes all economic income as opposed to our more

accounting-based system. Under such an approach, credits, deductions,

exclusions, deferrals, and similar items are congressional expenditures.

Theoretically, Congress could take all income; hence, any reductions

particularly those resulting from deductions, exclusions, and credits are no

different than appropriations.

19Arizona Christian School Tuition Organization v. Winn, 563 U.S. ____, ____ (2011)(describing a credit as a type of spending and likening the economic effects of appropriationsto those of credits). The four dissenting Justices described a credit as a form of spending.The majority (other than the two concurring Justices) were more circumspect. Generally,they described credits as spending; however, for purposes of taxpayer standing under Flastv. Cohen, 392 U.S. 83 (1968) the three distinguished an appropriation from a credit. Anappropriation involves actual spending while a credit involves reduced taxes. The Court thusnarrowly construed the Flastexception to the general taxpayer standing rule of Frothinghamv. Mellon, 262 U.S. 447 (1923). Nothing in the opinion suggests the Court viewed credits asauthorized under the Taxing Power. Significantly, the Court distinguished a law which taxes

and spends from one which merely distributes property under the Property Clause. Thelatter is part of the Spending Power; however, it does not fit the narrow Flastexception.20SeeJCT, "Estimates of Federal Tax Expenditures for Fiscal Years 2009-2013," JCS-1-10(Jan. 11, 2010), Doc 2010-631 , 2010 TNT 7-22. According to the Congressional Budget andImpoundment Control Act of 1974 (Pub. L. No. 93-344), sec. 3(3), The Budget Act requiresCBO and the Treasury to publish annually detailed lists of tax expenditures. Tax expendituresare defined . . . as "revenue losses attributable to provisions of the Federal tax laws whichallow a special exclusion, exemption, or deduction from gross income or which provide aspecial credit, a preferential rate of tax, or a deferral of tax liability."


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Some, including the Supreme Court, have criticized the tax expenditure

analysis.21 Some find the underlying rationale disturbing: that Congress may

take everything and then may, through its largesse, allow the people to retain a

portion of what was theirs. But, the Taxing Power while horizontally limited

by the uniformity, apportionment, and derived/source requirements is not

limited vertically in amount.22 Marginal income tax rates have exceeded

90%.23 Some current excise tax rates are well over 100%.24 Thus,

fundamentally, Congress could take all income and tax all property at 100%. It

could then grant deductions, exclusions, credits, and such so long as they

were for the General Welfare.

This fundamental realization, however, does not cause credits,

deductions, and exclusions to be negative taxes. The Taxing Power limitations

21

The Arizona Christian Schoolmajority implicitly criticized the tax expenditure concept: Likecontributions that lead to charitable tax deductions, contributions yielding STO tax credits arenot owed to the State and, in fact, pass directly from taxpayers to private organizations.Respondents' contrary position assumes that income should be treated as if it weregovernment property even if it has not come into the tax collector's hands. That premise findsno basis in standing jurisprudence. Private bank accounts cannot be equated with theArizona State Treasury. Slip op. at 20.22Veazie Bank v. Fenno, 75 U.S. 533, 548 (1869), 8 Wall. 533, 548: "The power to tax may beexercised oppressively upon persons, but the responsibility of the legislature is not to thecourts, but to the people by whom its members are elected." (quoted in Magnano v. Hamilton,292 U.S. 40, 45 (1934)).23The Revenue Act of 1964 decreased the top individual rate from 91% to 70% and the top

corporate rate from 52% to 48%. Previously, the 91% rate applied to individuals with taxableincome over $200,000 and to married persons filing jointly with taxable income over$400,000. In 1944, the top individual rate was 94% for taxable income over $200,000.Federal Income Tax Rates History, Income Years 1913-2011, Tax Foundation (2011).24I.R.C. 4945(b) imposes a 100% tax on uncorrected private foundation taxableexpenditures, in addition to the subsection (a) 20% for a total of 120%. Section 6684imposes a penalty equal to the tax if the act or failure is willful and flagrant, or if the personlacks reasonable cause and has previously been subject to a Chapter 42 excise. Theeffective tax rate thus reaches 240%.


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are real, both politically and constitutionally. Congress has not chosen income

tax rates approaching 100% in six decades. The theoretical system under

which Congress could take everything and then hand it back to the people is

unworkable: incentives, disincentives, and distortions would be rampant.

Congress has chosen much lower rates, albeit rates sufficiently high such that

it has wiggle-room25 for spending through myriad deductions, exclusions, and

credits.

Unfortunately, the tax expenditure analysis uses a static view of

deductions, credits, and other items.26 A credit costs what it appears to cost

revenue lost because it is there rather than not. A staticanalysis ignores the

response people have to the credit, deduction, or exclusion. It assumes

people take the deduction and accept the tax benefit; but, the analysis ends

there. In contrast, a dynamic approach considers how people change their

behavior because of the credits or the deductions existence.27 For example,

25Indeed, a great deal of wiggle, amounting to a static analysis $8.6 trillion in taxexpenditures for 2011-16. Fiscal Year 2012 Analytical Perspectives, Budget of the U.S.Government. (Feb. 2011), Tables 17-1 and 17-2.26Donald B. Morron, How Large are Tax Expenditures?TAX NOTES, March 28, 2011 at 1597(The published tables report static estimates of how much each tax expenditure reducesindividual and corporate income tax receipts.).27The Arizona Christian Schoolmajority alluded favorably to the dynamic approach: When a

government expends resources or declines to impose a tax, its budget does not necessarilysuffer. Slip Op. at 18. Also: By helping students obtain scholarships to private schools, bothreligious and secular, the STO program might relieve the burden placed on Arizona's publicschools. The result could be an immediate and permanent cost savings for the State. Idat20. Similarly, the Court criticized the so-called tax expenditure argument in DaimlerChyslerv. Cuno, 547 U.S. 332, 344 (2006) (Ginsburg, J., concurring) (unanimously rejecting statetaxpayer standing based on alleged harmful consequences from so-called taxexpenditures): As an initial matter, it is unclear that tax breaks of the sort at issue here do infact deplete the treasury: The very point of the tax benefits is to spur economic activity, whichin turn increases government revenues. In this very action, the Michigan plaintiffs claimed


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taxpayers may enter more transactions or different transactions than they

otherwise would have entered absent the credit. Such a dynamic analysis is

more complicated,28 but it aims to recognize the reality of how credits,

deductions, and exclusions alter human behavior dynamically and how those

changes permeate the economy. Indeed, under a static view, some

deductions may cost money; however, under a dynamic view, they may

encourage sufficient extra economic activity such that they raise more money

than they cost.29 Regardless, the Congressional Budget Office and the tax

expenditure analysis treat deductions, credits, and exclusions as expenditures

in the same sense they view appropriations.

While tax expenditure analysis critics have a point, the proponents have

the Constitution on their side. To be forthright, while some authorities criticize

the tax expenditure model, others dismiss many criticisms as silly.30

that they were injured because they lost out on the added revenues that would haveaccompanied DaimlerChryslers decision to expand facilities in Michigan.28Even strong tax expenditure analysis proponents admit a dynamic approach would becostly and unrealistic. Edward Kleinbard, Spending Reductions, Taxprofblog (Apr. 14,2011, 6:45 p.m. EST) (describing our analysis: This last bit of tax expenditure analysisbashing really is silly. First, TEA is not static. The specific numbers cranked out each yearby JCT are static, and are expressly described as such, because to do otherwise would be atremendous amount of work; and because the specific shape of any repeal would not havebeen specified.) The quotation continues to explain that JCT general revenue estimates aredynamic. Note an important assertion: TEA is not static, only the numbers are. What

remains other than the numbers is unclear. The basic admission is: TEA is static and anyother method is unworkable. Also, the admission rests on the alternative of repeal, asopposed to the more important effects of the tax expenditures existence: how peoplerespond to what the statute does as opposed to what it would not do if it were not there.Ultimately, that is the point of this paper: people respond to different stimuli differently.29Arizona, supra note 20, at 12; DaimlerChysler, supra note 29.30Martin J. McMahon, Taxing Tax Expenditures, TAX NOTES, Feb. 14, 2011 at 778; Kleinbard,supra note 30, pointing out that criticisms of TEA for being static are silly because the onlythe numbers are static.


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A. A Credit Versus a Tax: Example One

Section 1396 Empowerment Zone Employment Credits31 are a function

of whether activity is within a particular zone. Qualified zones are a function

of population and income. As the Supreme Court has explained, taxes on

employers are excises, not income taxes.32 They must be uniform.33 This

particular credit cannot possibly be uniform because United States population

density is non-uniform. But, the credit remains constitutional because the

Spending Power authorizes credits. They must be for the General Welfare, but

they need be neitheruniform norapportioned. Penalties and taxes (to use the

governments denomination of the Health Care penalty) must be uniform if they

are indirect and apportioned if they are direct; credits, however, need not

satisfy eitherrestriction.

Further, penalties and taxes which must meet 16 th Amendment

restrictions and some proponents argue the Health Care penalty taxes

income must satisfy four specific limitations. In contrast, credits need not be

related to gross income derived from a source, as must taxes on income.

Credits and deductions are matters of Legislative Grace.34 Essentially, they

31

JCT, supra note 11, at 19.32Flint v. Stone Tracy Co., 220 U.S. 107 (1911).33U.S.CONST. ART.I,9, CL.1.34New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Deputy v. du Pont, 308 U.S.488, 493 (1940); Interstate Transit Lines v. Commr, 319 U.S. 590 (1943). Under theLegislative Grace Doctrine, courts read deductions, credits, and exclusions narrowly andliterally. As the constitution does not require them, taxpayers carry the burden of citingspecific provisions clearly authorizing various tax benefits.


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are at the whim of Congress, subject only to the General Welfare limitation or

the other enumerated powers limitation. Uses of the Spending Power need not

satisfy uniformity and apportionment.B. Example Two

If credits can destroy a taxs uniformity, do they not eviscerate the

uniformity requirement? The short answer is yes. But the longer answer

considers other limitations. For example, Congress might enact a uniform

excise and then grant a credit such that everyone other than Delaware

residents effectively would pay no tax. The excise would remain uniform;

however, one could hardly claim the credit was for the General Welfare.

Certainly Delawareans would object. Thus the General Welfare limitation has

someteeth to it and uniformity would remain.

C. Example Three

Congress could grant a credit, but limit it to white males. That would

raise questions not only under General Welfare, but also Due Process and

Equal Protection. Surely, it would be struck down, again protecting the

constitutional limitations on the Taxing Power.

While the Court has effectively incorporated the Due Process and Equal

Protection Limitations against Congress through the Fifth Amendment,35 the

35Bolling v. Sharpe, 347 U.S. 497, 498-99 (1954).


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case would involve a serious issue. In its 1916 Brushaber36 decision, the

Supreme Court held the Fifth Amendment due process clause not to be a

limitation upon Congress Taxing Power. In 1934, the Court applied a similar

rule, finding the Fourteenth Amendment Due Process and Equal Protection

limitations not to be limits on state taxing powers. That same year, the Court

reiterated its 1916 Brushaber holding; however, it described some loopholes:

Except in rare and special instances, the due process of law clause contained

in the Fifth Amendment is not a limitation upon the taxing power conferred

upon Congress by the Constitution.37

The hypothetical discriminatory tax would not stand; however, it would

force the Court to more precisely describe the various limitations on the Taxing

Power, as well as on the Spending Power and to distinguish the two. In any

event, the differences between the Taxing and the Spending powers are

constitutionally significant.

36Brushaber v. Union Pacific Railroad, 240 U.S. 1, 24 (1916): So far as the due processclause of the 5th Amendment is relied upon, it suffices to say that there is no basis for suchreliance, since it is equally well settled that such clause is not a limitation upon the taxing

power conferred upon Congress by the Constitution; in other words, that the Constitutiondoes not conflict with itself by conferring, upon the one hand, a taxing power, and taking thesame power away, on the other, by the limitations of the due process clause.37A. Magnano Co. v. Hamilton, 292 U.S. 40 (1934) (involving a Washington state excise tax).The Court found the 14th Amendment inapplicable to state taxing powers: That clause isapplicable to a taxing statute . . . only if the act be so arbitrary as to compel the conclusionthat it does not involve an exertion of the taxing power, but constitutes, in substance andeffect, the direct exertion of a different and forbidden power, as, for example, the confiscationof property. Id. at 44.


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II. PROCEDURAL DIFFERENCES

Procedurally, the current system has two functions: the mandate and the

penalty. A system of credits would have one function: the credit. While the

Health Care Act was over 2,000 pages long, the portion involving the

tax/penalty is brief.38 For a credit to achieve the identical result would not be

simple.

The initial question goes to whether the hypothetical credit would be

substantively the sameas the current system. To accomplish that result, the

drafting could be daunting. Congress would have to define the credit such that

those who do not receive it would be exactly the same as those who will suffer

the current penalty. Theoretically, drafting the bill might be possible; however,

no one has produced suggested wording. Courts should exercise caution in

analyzing a theoretical statute. The language would likely be complex because

it would become a series of double negatives defining people who do not

receive the credit because they do not acquire insurance within a given period.

It would define people who buy insurance; however, because the penalty

involves not having insurance for particular periods one and three months

the provision would need exclusions for those with insurance for only part of

the year. It would also be a function of income, with a floor and a ceiling, as is

the case with the penalty. Thus the credit would have many exceptions and

38I.R.C. 5000A.


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exclusions. It would either be a function of time, or it would have complicated

recapture rules for taxpayers who bought insurance and then allowed it to

lapse. It may not be procedurally possible to accomplish the exact same

substance, or even substance very similar to the current Act. If possible, it

would be complex and likely quite different procedurally.

Why is procedure relevant? At some level it is not; however, the

question posited is effectively this: can a court treat the current statute for

constitutional purposes as if it were substantively a credit rather than a

mandate and a penalty. Essentially, that question puts the court into the

business of judging hypothetical statutory language not actually before the

court, and not evenhypotheticallybefore the court. The procedural differences

thus are central to whether the statute before the court is constitutional. If

another statute would be constitutional, but if no one can propose the

language, then arguably it is procedurally so different as to be irrelevant.

III. PRACTICAL DIFFERENCES

Even a perfectly-drafted statute designed to be substantively the same

as the current system, if possible, would have substantial practical differences.

The credit and the penalty would have different impacts on participation and

revenue, which relates to the earlier static versus dynamic discussion

regarding tax expenditures. Remember: the question asked considers whether

the hypothetical alternative credit would be substantively the same asthe Act;


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hence, the actualimpact is critical.

Penalties and taxes whichever the current Act imposes are

enforceable. In contrast, credits are voluntary. The current penalty has limited

statutory enforcement provisions: it does not involve criminal or other tax

penalties or interest. However, the Treasury has meaningful enforcement

options. First, it can arguably withhold, through a set-off, a refund otherwise

owed to one who fails to pay a penalty. Second, it can promulgate timing

regulations which allocate tax payments. For example, the government might

allocate the first tax dollar paid during a year to any health care penalty even

if that tax were ostensibly for an income or an employment tax.39 Money is

fungible. The Treasury Department can issue regulations allocating payments

to principal, to interest, or to a particular tax; it need not follow a taxpayers

allocation. That makes the potential for enforcement real.

In contrast, the hypothetical credit is by definition optional. This would

necessarily be a complicated credit a function of both income and time. In

general, credits are notorious for escaping taxpayers attention. One cannot

take most of them on a Form 1040EZ; instead, taxpayers must typically file a

longer form, as well as a special credit form. Tax lawyers and accountants

tend to find the Earned Income40 and the Child Tax Credits41 complicated. The

39See similar ideas discussed in Daniel L. Mellor, The Individual Mandate Tax: Healthcare'sToothless Watchdog, TAX NOTES, Jan. 3, 2011, p. 105, Doc 2010-25359.40I.R.C. 32.41I.R.C. 24.


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average taxpayer finds them daunting; hence, the enormous business in tax

preparation services. Many credits go unused.42 Arguably, the hypothetical

credit if it could be drafted - would produce similar results. Many taxpayers

would not understand it. Many would miss it. The Treasury has the power to

enforce the penalty particularly if it chooses to issue moderately aggressive

regulations; however, simplifying credits and the respective tax forms is

difficult. Realistically, the practical impact of the hypothetical credit would

almost certainly be very different than the practical effect of the health care

penalty. In a wooden, static view, the credit might theoretically reach the same

persons with the same consequences; however, in a realistic, common-sense

dynamic view, the similarities would likely evaporate.

Thus, the question asked rests on a false assumption: a system of

credits would be substantively the same as a system comprising a mandate

and a penalty. But it would notbe. It would look very different. It would be

more complicated. Taxpayers would react to it differently because of the

inevitable drafting differences and the inevitable appearance differences on tax

forms. These results are real. Thus courts cannot logically substitute, even in

theory, a credit for a mandate and penalty. They are too different in real terms,

42Thomas L. Hungerford and Jane G. Gravelle, Tax Incentives for Job Creation: Are TheyEffective? 127 TAX NOTES 325 (Apr. 19, 2010) (providing examples of unused credits andother tax incentives); Elaine Maag, 130 TAX NOTES 1587, 1594 (Mar. 28, 2011) (Familieswith children face a daunting array of tax policies that reduce their tax liabilities, relative tofamilies without children. Although of monetary value to families, the complex structure ofthose incentives puts families at risk of not understanding the policies . . . . As a result, somefamilies who should benefit from the child provisions do not benefit, and others who shouldnot benefit do.


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to say nothing of constitutional terms.

IV. PSYCHOLOGICAL AND ECONOMIC DIFFERENCES

Think of carrots and sticks. A four-year old knows the difference. A

parent might say, Pick up your toys, or get a spanking. Another parent might

offer candy as a reward. Each is valid parenting, but they are very different.

The same is true of training dogs: reward versus punishment. Psychologists

have debated it for centuries . . . even the Bible speaks of the issue.43

Why is this relevant? Taxes and penalties are sticks. They are painful.

They take from people what people otherwise have. But credits are different.

They reward. They give the recipient something he otherwise does not have.

They are much more like candy. They can be effective, but the effect is

different and it is perceived as different. Congress knows that, just as a four-

year-old and a Great Dane know it. These are fundamental notions of

economics and psychology. Many economists study how people react to

different stimuli44 remember the dynamic approach to tax expenditures rather

than the static approach. Psychology involves similar study. So should a

policy analysis of law.

43Proverbs13: 24: He who spares the rod hates his son, but he who loves him is careful todiscipline him. Proverbs 23: 13-14: Do not withhold discipline from a child; if you punish himwith the rod, he will not die. Punish him with the rod and save his soul from death.44Steven D. Levitt and Stephen J. Dubner, FREAKONOMICS:AROGUE ECONOMIST EXPLORESTHE HIDDEN SIDE OF EVERYTHING, Ch. 2, pp. 15-50 (Harper, 2009) (explaining the generalhuman temptation to cheat and the various ways society and economics deals with thatreality, through guilt, shame, fines, rewards, and punishment).


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Consider a few areas. Society punishes murder and theft it does not

reward the absence of murder and theft. Society rewards heroes it does not

punish the vast majority who do nothing heroic today. Duty is a strong

motivator for many people those who want to do the right thing because they

have a strong moral compass. Shame is a different motivator overt guilt for

those who want to do the right thing, but who might succumb to private

temptation. Various levels of overt punishment from taxes to fines to

imprisonment or death motivate others who might not care about internal or

even public shame.

Also, reward has a critical role in economics and psychology. Dogs and

children react positively to cookies. Young students work harder for stars and

stickers, while older students demand high grades or public praise. Employees

work for money. Corporations and countries alter their behavior because of

grants and aid. Importantly, they do not consider prosecution and war to be

the mirror images of subsidies and aid. No one does.

Proverbs said: spare the rod, spoil the child. Current psychology

emphasizes self-esteem and reward and generally abhors spanking,

preferring time-outs and talk. We do not argue whether reward or punishment

is the better technique for motivating dogs, children, thieves, nations, or even

taxpayers. We merely point out the obvious: the techniques differ. Mankind

has known this forever. And so did our Founders; hence, different limitations

on taxing and spending.


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CONCLUSION

The Constitutional Convention raised serious issues regarding

governments ability to take money from people. The American Revolution

began with a tax rebellion the first Tea Party. The Constitution limits

Congresss Taxing Power sharply: uniformity, apportionment, gross income

fromwhatever sourcederived. But that same document significantly fails to

limitCongress spending power.

Why the limits on how Congress can take money, but so little limitation

on how it can spend it? That is not really the issue. The issue is simpler:

whatever the reasons for the differences between taxing and spending, those

differences exist. The Constitution imposes them and courts must follow them.

A candy bar does not substitute for a spanking. A credit does not substitute for

a tax. Both have their roles. Both serve legitimate purposes. But they differ,

profoundly so. The Constitution treats them differently, and courts should

respect it.

Credits vs. Taxes: The Constitutional Effects on the Health Care Debate

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