(J.D. 2010, Florida) have posted
on SSRN. Here is the
This viewpoint addresses one particular issue: how a credit differs from a tax or penalty. Some people argue the constitutional objections to the Health Care Act are moot because Congress could constitutionally accomplish the same goals with a credit for health insurance purchasers; however, such a credit would not likely have the same substantive effects as Section 5000A – the health care penalty.
Credits differ from taxes in several ways: constitutionally, procedurally, substantively, economically and psychologically.
Constitutionally, credits are a form of spending, as is evident from the CBO’s annual Tax Expenditure Budget, which details the static costs of various deductions, credits and exclusions. The Supreme Court has also treated credits as a form of spending, as recently as the 2011 decision in Arizona Christian Schools. The Arizona majority distinguished credits from appropriates for taxpayer standing purposes; however, it accepted the general rationale that credits are not merely negative taxes subject to the Taxing Power limitations. Limitations on the Spending Power differ significantly from limitations on the Taxing Power.
Procedurally, credits involve a single step while the current Act involves both a mandate and a tax or penalty. Drafting credit language to reach the exact opposite persons – those to be subsidized rather than penalized – would be a complicated drafting task. So far, no one has proposed the language. Courts must not assume such language is feasible.
Substantively, credits and penalties or taxes reach different persons because of their inherent natures: taxes and penalties are enforceable while credits are voluntary. Compliance with taxes and penalties, while not universal, differs from compliance with credits and deductions.
Economically and psychologically, credits differ profoundly from taxes and penalties. One is a carrot while the others are sticks. People inevitably react differently to rewards as opposed to punishment. While both are highly motivating, they serve different purposes. The fields of economics and psychology both study the relative effects and commonly explain how reward and punishment are not interchangeable.
The tax expenditure analysis, while supporting the notion of credits as spending, is flawed. Because it rests on a static numbers, rather than dynamic, it provides incomplete and potentially misleading information.