Taxes & Regulations: Free Trade Has a Smarter Guardian

Today’s Supreme Court decision upholding the individual mandate rests on a purely fictional distinction between taxes and regulations that does not exist in other areas of law that restrain the power of Congress. While the Constitution is a document that, when properly read, grants limited power to the national government, the United States has signed international documents promising not to exercise some of those powers. The agreements that form the obligations of membership in the World Trade Organization contain direct disciplines on the exercise of government power relating to the regulation of international trade. The reason this is particularly relevant today is that the drafters of these texts were acutely aware that a tax, by any other name, would impede trade just as effectively. Consider paragraph 1 of Article III of the General Agreement on Tariffs and Trade:

The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production. (emphasis added)

This coupling of taxes and regulations is found throughout international trade law for the simple and obvious reason that if the disciplines addressed only taxation, national governments would just alter the form of their protectionist measures and apply equivalently restrictive internal regulations. These disciplines harness the power of international law to prevent (or at least hinder) the U.S. government from coercively directing the commercial choices of Americans for the benefit of special interests.


In a post earlier today on Cato@Liberty, my colleague Chris Edwards offered some hypothetical laws of the future that would be justified under the reasoning embodied in the Supreme Court’s decision. One of them especially caught my attention:

Federal Domestic Jobs Act of 2016: Don’t exceed 25 percent foreign content on family consumer purchases, else pay the IRS $4,000.

While the Supreme Court’s constitutional analysis could now be affected by the fact that the word “IRS” is mentioned in the law, the WTO doesn’t care because it treats taxes and laws the same. What matters for WTO purposes is the effect of the measure, regardless of its form. The words “Don’t exceed 25 percent foreign content” are sufficient to make this law WTO‐​inconsistent regardless of who you have to pay when you do.


Although the Supreme Court may fail to recognize constitutional restraints on power that should prevent the federal government from forcing us to buy insurance, eat broccoli, or recycle, there remains one institutional impediment (albeit one of narrow scope and power) that is not hoodwinked by a fictional distinction between laws and taxes.