Paul L. Caron

Tuesday, July 13, 2010

Willis & Chung: The Tax Penalty in ObamaCare Is Unconstitutional

Steven J. Willis (Florida) & Nakku Chung (J.D. 2010, Florida) have posted Constitutional Decapitation and Health Care, 128 Tax Notes 169 (July 12, 2010), on SSRN.  Here is the abstract:

Willis and Chung demonstrate how I.R.C. § 5000A – the Health Care Act penalty – is an unapportioned capitation tax, violative of U.S. Constitution Article I, Section 9. As they demonstrate, the "penalty" is – at least on its face – a tax. To be a constitutional tax, it must be an excise tax, an income tax, or a proportional capitation tax. Through the process of elimination, they demonstrate the penalty is none of these.

Others convincingly demonstrate the "penalty" is unconstitutional under the Commerce Clause. They argue the "penalty" is indeed a penalty and not a tax. Willis and Chung pick up where that argument leaves off: if that argument fails and the Court finds this is a tax, it is an unconstitutional unapportioned direct tax.

Despite being labeled an excise tax by Congress, the penalty is unlike any existing excise tax because it applies to the failure to act by an individual. Existing failure-to-act excise taxes differ because they apply to entities which have chosen to partake in particular activities. The provision thus fails the historic requirements of an excise tax, namely that it apply to an activity, transaction, or the use of property. The tax also fails the traditional "pass-on" nature of excise taxes. If the Court were to approve it as a uniform excise tax, the direct tax apportionment requirement would be eviscerated.

The penalty similarly fails the 16th Amendment definition of an income tax. Not only does it appear not to tax income, it fails to operate as an income tax, and it fails the 16th Amendment realization requirement long accepted by the Supreme Court. Willis and Chung dismiss – as unrealistic academic dogma – arguments for ignoring the realization requirement. They acknowledge, but refute, academic arguments criticizing the Pollock and Macomber decisions, as well as arguments for ignoring the Constitution's direct tax apportionment requirement.

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The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion.

If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, or file a frivolous tax submission. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty. More Info.

Posted by: Mike Habib | Jul 15, 2010 6:42:19 PM

I think the authors are incorrect in maintaining that one of the characteristics of an excise is that its burden can be passed on to someone else. Such a claim was rejected in Knowlton v. Moore, upholding the estate tax as an excise (the burden of which can't be shifted for obvious reasons).

Posted by: Guy Helvering | Jul 13, 2010 11:32:08 AM