The Obamatax ensures extraordinarily expensive Obamacare

By Michael R. Strain | AEI

Don’t listen to what you’ve heard in the media — whether Obamacare’s individual mandate imposes a tax or a penalty does matter.  The Supreme Court says the mandate merely imposes a tax which citizens can lawfully choose to pay instead of purchasing health insurance; meaning that going without insurance will not be perceived as an unlawful violation of federal regulation.

In light of the court’s ruling, many of the people who would have purchased insurance to avoid breaking the law will now take the cheaper tax option.  This will raise premiums for us all, and make Obamacare even more expensive to taxpayers than was previously thought.

The fine for not buying health insurance under Obamacare is quite small — the greater of $695 per year or roughly 2.5 percent of income for a single person.  Put more simply, the fine is much less than the cost of an insurance policy for the overwhelming majority of Americans.  But many of the law’s supporters have been very optimistic that a large number of the currently uninsured will comply with the mandate and purchase insurance.

Given the small penalties, will people comply with the individual mandate?  The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimate that the mandate alone, separate and apart from the other provisions in Obamacare designed to induce people to buy insurance, will be responsible for bringing in 16 million newly insured — about half of the total estimated number of newly insured.

Why is this the case?  We know it’s not a cost calculation.  Under Obamacare a person cannot be denied coverage or charged a premium because of being sick or injured at the time of applying for insurance.  So it will be much cheaper for the uninsured to remain that way and pay the penalty, which will usually be much smaller than the cost of insurance, and then delay purchasing protection until they actually need health care.

Instead, some of the reason is that many people simply don’t want to commit unlawful behavior.  They don’t want to wear Hester Prynne’s scarlet letter. Indeed, assuming that people will not want to violate a new social norm of purchasing health insurance is an explicit part of the CBO and JCT’s estimate of the number of people complying with the mandate under Obamacare.

But the court’s ruling could change all that.

The Supreme Court explicitly states that noncompliance with the mandate is lawful.  “Indeed, it is estimated that 4 million people each year will choose to pay the IRS rather than buy insurance,” writes the court.  “We would expect Congress to be troubled by that prospect if such conduct were unlawful.  That Congress apparently regards such extensive failure to comply with the mandate as tolerable suggests that Congress did not think it was creating 4 million outlaws.”

Instead, says the court, “the shared responsibility payment merely imposes a tax citizens may lawfully choose to pay in lieu of buying health insurance.”

This changes the psychology completely.  People’s desire to obey the law will allow them to choose the cheaper option and pay the tax.  If people don’t feel that they are violating the law by going without insurance, then the government’s goal of creating a new social norm where everyone purchases health insurance will be hindered.  Many people who would have purchased insurance when failure to do so was a penalty now may not do so, since it is a tax.

Think of what can now happen due to the court’s ruling.  When you sit down with your HR representative to discuss benefits, your HR rep will tell you that paying the fine instead of buying insurance is a lawful choice — your rep won’t tell you that paying the fine, though cheaper, puts you in violation of federal regulation.  When you sit down to pay your taxes, Turbo Tax or your accountant will tell you the same thing — you aren’t violating a government regulation by forgoing insurance and paying the tax; instead, you’re making a lawful choice between two options.

Very importantly, the news media can frame the fine as a tax.  And it has.  Since the court’s verdict the media have aggressively tried to get the White House to acknowledge that the mandate now imposes a tax and not a penalty.  For many reasons, the White House refused to acknowledge what the court said in plain English.

Economics has traditionally assumed that your preferences do not depend on government action, but a bit of thought finds this assumption to be lacking.  Social norms, cultural conventions — indeed, sometimes even ethics and values — are shaped by government policy.  John Donne was right that “no man is an island,” as was Aristotle, who writes that government can make “the citizens good by forming habits in them.”

People have a preference not to engage in unlawful behavior, and Obamacare hoped to take advantage of that to create a new social norm where everyone buys insurance.  But the court’s decision puts the success of this effort in serious doubt, as it explicitly states that going uninsured is a lawful choice.

Who might choose to pay the tax instead of purchase health insurance?  Well, they will be the people who are the least likely to need insurance.  This will increase the “adverse selection” in the market — those people who are most likely to need expensive health care will disproportionately purchase insurance.  This in turn will drive up the premiums everyone has to pay, which will increase the amount of tax dollars the government must spend.

In other words, thanks in part to the court’s ruling, the mandate imposes a tax that we can’t afford.

Michael R. Strain is a research fellow at the American Enterprise Institute.

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