Thursday, October 25, 2012

Another Reason to Oppose Obamacare’s Taxes

An interesting article at the Atlantic’s website last week noted that the Supreme Court’s ruling that Obamacare’s mandate is a tax doesn’t just violate the President’s “firm pledge” not to raise taxes – it could also undermine Obamacare itself.  Based on research in behavioral economics, George Washington University professor Naomi Schoenbaum concludes that calling the mandate a “tax” and not a “penalty” means fewer Americans are likely to comply with it:

If the mandate is framed as a tax, this could cut in several directions, all of which would reduce health insurance coverage.  It could lead people to suspect that others are neither paying the tax nor purchasing health insurance, leading them to try this strategy themselves.  Or, given that purchasing health insurance is several times more expensive than paying the tax (which, in 2014, will be only $95 or 1% of income), people might decide to pay the tax rather than purchase the more expensive health insurance.  And this phenomenon can build on itself: once an impression of low compliance with the mandate is forged, fewer people will comply, further reinforcing the low compliance impression, and so on.

In either situation, the tax label could lead significantly fewer Americans to purchase health insurance than the penalty label would. The success of Obamacare depends crucially on people buying health insurance under the mandate rather than making a payments to the government….The only way to keep costs from skyrocketing or insurance companies from dropping out of the market, or both, is either to get more healthier, cheaper folks to join the insurance pool, or have them pay an equivalent dollar amount.  With the tax frame, though, individuals are less likely to buy health insurance.  And the mandate as currently structured forces them to pay only a small amount for the failure to do so.

The article argues that the difference between the mandate as a “tax” and the mandate as a “penalty” will have a major impact on compliance with the law – with the mandate’s tax status making it more likely the law will be undermined.  But in its re-estimate of the health care law in light of the Supreme Court’s ruling, the Congressional Budget Office said the ruling that the mandate was a tax and not a penalty did not change its assumptions about compliance with the mandate at all:

CBO and JCT’s original assessment of the effects of the coverage requirement was strongly rooted in comparisons with other taxes and penalties, drawing heavily from the academic literature on tax compliance.  In earlier estimates, CBO and JCT expected that individuals would perceive the mandate as a requirement to purchase insurance or pay a penalty tax administered by the Internal Revenue Service.  Because the Court upheld the constitutionality of that arrangement, CBO and JCT continue to expect similar behavioral responses to the insurance requirement.

Put another way, the Atlantic piece emphasizes how CBO’s score of Obamacare – by assuming strong compliance with the unprecedented individual mandate – is an optimistic, and possibly unrealistic, prediction of how the law will be implemented and enforced.