September 22, 2009 2:57PM

Gruber on Whether Mandates Are Taxes

Yesterday, on PBS's NewsHour, I debated MIT health economist Jonathan Gruber on (among other things) whether the individual mandate in President Obama's health plan is a tax.  As you can see in this video, Gruber pretty clearly states that the mandate is not a tax:

Which seems to conflict with what he wrote in his textbook:

Suppose...the government mandated that everyone buy full insurance at the average price of $825 per year...This would not be a very attractive plan to careful consumers, however, who could view themselves as essentially being taxed in order to support this market, by paying higher premiums than they should based on their risk.

There are really two government interventions at play in that example: the mandate that requires everyone to purchase insurance (whether they want it or not), and the price controls that force low-risk consumers to pay more than an actuarially fair premium.  One could say that it is the price controls, rather than the mandate, that Gruber likens to a tax.  It might be inconsistent, however, to suggest that when price controls force you to pay more for something than the market would charge, that is a tax, but when a mandate forces you to purchase something you don't want at all, that's not a tax.

Gruber also suggests that, for better or worse, the arbiter of whether a mandate is a tax is the Congressional Budget Office, and the CBO has said that the mandates in the leading health-reform bills are not a tax.  I think that's incorrect for a few reasons.

  1. As I mentioned on the NewsHour and blogged earlier, the CBO has affirmed that the penalties for non-compliance are taxes.
  2. The CBO has not declared that the mandated private payments that result from the individual mandate are not a tax.  What the CBO has said is that -- as the leading health-reform bills exist today -- those mandated private payments do not meet the CBO's definition of "federal revenues."  In this report, the CBO explains that it will consider those mandated private payments to be federal revenues only if the government denies consumers a "sufficient" or "meaningful" or "substantial" degree of choice among health plans.  Faced with the necessity of drawing a line between what it will and will not include in the federal budget, the CBO made a judgment call and drew a line.  The agency went no farther; it did not say that mandates are taxes only if they fall on one side of that line.
  3. If the CBO's determination of what constitutes "federal revenues" were to be the arbiter of what constitutes "a tax," that would lead to absurd results.   Suppose Congress enacts the Baucus mandate, and then next year a new CBO director changes the rule so that those mandated private payments do count as federal revenues.  The result?  A massive tax increase!  Despite the fact that CBO has no authority to raise taxes.  And despite the fact that there would be no tax increase.   CBO’s change of heart would not alter public or private fiscal flows by one penny.

The president and his supporters have a tough road to hoe if they want to claim the individual mandate isn't a tax.