The Individual Mandate Tax Penalty

Abstract:     
In 2010, President Obama signed legislation that significantly altered the healthcare and health insurance markets in the United States. An integral part of that reform is the individual mandate, a provision that requires individuals to purchase and maintain healthcare insurance. Failure to maintain such coverage subjects an individual to a tax penalty. The Supreme Court recently heard oral arguments on the constitutionality of that provision in particular which, if found unconstitutional, could lead the Court to strike down the entire reform legislation.

Whichever way the Court rules, fundamental questions will remain. This article addresses the question of whether the use of a tax penalty to encourage taxpayers to do something that the government desires is normatively a good idea. Many commentators have contended that a tax penalty is economically equivalent to the current tax system’s use of deductions and credits to encourage behavior. This article argues that despite some similarity, there are major differences between the two that should lead Congress to consider whether the desirability of using this tax penalty approach in the future. This article also questions whether the use of the Internal Revenue Service to administer and enforce a penalty that has little to do with the correct baseline of income will have an effect on general tax compliance.

This article explores the individual mandate tax penalty in detail. It explains the mechanics of the tax penalty provision and points out several ambiguities in the provision that will likely require clarification. It also explores the issue of whether some of the problems in the healthcare system at which the mandate is aimed have been exaggerated. The author is skeptical of the extent of some of those problems and contends that the use of the tax penalty is inappropriate. The article concludes that Congress should reexamine the pros and cons and unintended consequences of using a tax penalty to induce behavior before going down a similar road.

Number of Pages in PDF File: 54

Keywords: Mandate, Healthcare, Penalty

JEL Classification: H20, H24, H29, H51, I10, I18

Accepted Paper Series