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It’s a Penalty. It’s a Tax. It’s Both.

On Friday the Bureau of Labor Statistics will release the latest monthly employment report and, at that point, the political conversation will probably turn away from health care and back to the economy. But with nothing to do between now and then—except enjoy time with your family, if, like me, you’re still on vacation—Washington is preoccupied with the debate over whether the individual mandate is a penalty or a tax, and whether Mitt Romney will keep changing his mind about which side of that debate to take.

The distinction between a tax and a penalty certainly has legal significance. At least in theory, the former is constitutional while the latter is not. But, as Ezra Klein notes today, the policy is the same either way. People who have access to insurance but choose not to get it are supposed to pay the government a fee. The fee goes as high as 2.5 percent of personal income, although there are exemptions. If you have religious objections to scientific medical care, you don’t have to pay the fee. If you face financial hardship, you don’t have to pay the fee. And so on.

Politically, the distinction between a tax and a penalty matters because Obama has famously promised, ever since his campaign, not to raise taxes on people making less than $250,000. I never liked that pledge and never thought Obama should make it, so I have no problem with tweaking him for that. On the other hand, this is not a broad-based tax on all Americans. It’s a tax only on people who engage in certain behavior—namely, declining to buy health insurance that the law makes available. Like Will Saletan says, it’s basically a “sin tax,” very much like the ones that cigarette users pay every time they buy a pack.

Also, the number of Americans who will actually make “shared responsibility payments,” as the law officially calls them, is exceedlingly small. The Congressional Budget Office estimates that about four million Americans will end up making the payments. That’s not much more than one percent of the population. And if I’ve done my math correctly, at least a quarter of them (and probably more) qualify as “wealthy” by any reasonable definition. 

You can decide for yourselves whether Obama’s embrace of the mandate constitutes a gross betrayal of principle. What you can’t take seriously are claims, which Romney and the Republicans keep making, that the Affordable Care Act constitutes the largest tax hike in history. As Politifact and other independent groups have pointed out, this is not even close to true.

In the aggregate, the mandate itself is tiny: It will raise $28 billion over the next decade, which is a relative pittance in the context of a law with outlays of more than $1 trillion. The Affordable Care Act has plenty of other taxes and, if you throw those into the mix, the revenue total goes way up. But even that sum would not put the law’s tax increases in the top ten and, by the way, most of those taxes don’t hit the middle class directly.

Kevin Drum explained this the other day:

Let’s be fair: When Republicans talk about ACA’s tax increases, most of them are talking about all the taxes in the bill, not just the penalty. But they’re still off base. There have been 15 tax increases of significant size since 1950, and Jerry Tempalski, a tax analyst in the Treasury Department, has estimated the size of all of them as a percentage of GDP. Tempalski hasn’t estimated the eventual size of ACA, but PolitiFact took a crack at it using the same methodology, and they figure that ACA amounts to a tax increase of 0.49% of GDP seven years from now. That places it tenth on the list.

It’s fair for Republicans to complain that ACA includes a bunch of new taxes. It does. Most of them fall on high earners and corporations, not the middle class, but they’re still taxes. However, the “biggest tax increase in history” nonsense is crazy, and no news outlet interested in accuracy should let it pass without challenge.

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