Cooter & Siegel: A Theory of the Taxing Power

Robert D. Cooter (UC-Berkeley) & Neil Siegel (Duke), Not the Power to Destroy: A Theory of the Tax Power for a Court that Limits the Commerce Power:

Article I, Section 8 of the U.S. Constitution explicitly gives Congress the power to regulate interstate commerce. Effective regulations often attach penalties to their violation. Section 8 also gives Congress the power to promote the general welfare by taxing. Interstate commerce is narrower than the general welfare, so the power to penalize is narrower than the power to tax.

As long as the U.S. Supreme Court declined to enforce limits on the commerce power, it had little need to distinguish between penalties and taxes. Recently the Court began to limit the commerce power, so it now needs to distinguish between them. Existing tax power jurisprudence, however, is inadequate to this need. This article analyzes constitutional text, structure, history, and precedent with help from economics in order to develop a theory of the tax power for a Court that limits the commerce power.

A tax usually applies to behavior that is not condemned in moral language. Instead, taxed behavior is often described in morally neutral terms or in the language of permission. People often infer permission from the absence of condemnation. Besides explicit or inferred permission, the material incentives of a tax usually dampen an activity without preventing it. Many people gain more from taxed activities than they pay in taxes. Furthermore, the tax rate usually remains the same for intentional or repeated conduct. Thus a tax provides incentives to dampen one’s activity, not to stop it.

Two ideal types of exactions differ according to their expressive and material characteristics. A “pure penalty” condemns behavior and prevents it, whereas a “pure tax” permits behavior and dampens it.. By condemning and preventing conduct, a pure penalty coerces morally and materially. In contrast, by permitting conduct without preventing it, a pure tax does not coerce morally or materially. According to longstanding doctrine, Congress has the constitutional power to regulate interstate commerce by imposing penalties that coerce, which we call the “pure penalty power.” But Congress lacks the constitutional power to pursue the general welfare by imposing pure penalties.

The difference in pure types underlies another difference that is reflected imperfectly in the Court’s jurisprudence. A penalty that prevents an activity cannot raise significant revenues, whereas a tax that dampens an activity can raise significant revenues. According to longstanding doctrine, Congress has the constitutional power to raise revenues by taxes that dampen behavior, which we call the “pure tax power.”

Problems of interpretation arise from “impure” exactions, in which the expression sounds like a penalty and the material characteristics look like a tax, or vice versa. The shared responsibility payment in the Patient Protection and Affordable Care Act (ACA) imposes a fee on applicable individuals who fail to obtain health insurance in accordance with the law’s minimum coverage provision. The ACA calls this exaction a “penalty,” which sounds like condemning wrongdoing — the wrong of remaining uninsured and shifting the risk of high medical costs to others. In contrast, the material characteristics of this exaction resemble a tax. Its level is set low enough so that at least some people expect to gain from paying it, instead of buying private insurance. Also, the exaction does not increase with intentionality or recidivism. The ACA’s expression sounds like a penalty and its material characteristic look like a tax.

When interpreting an exaction, should expression trump materiality or should materiality trump expression? Our answer depends on the exaction’s effects. If it works like a penalty by preventing conduct, then it should be interpreted as a penalty. If it works like a tax, then it should be interpreted as a tax. We think that most people will respond to the ACA’s material incentives, not to its expression. People are characteristically self-interested with respect to their finances and health.

When interpreting exactions under the General Welfare Clause, the Court has long suggested that materiality should usually outweigh expression. For purposes of the tax power, a statutory provision that sounds like a regulation, looks like a tax, and works like a tax should be interpreted as a tax. It is a tax equivalent.