P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptWhat is a tax?SPAN style=mso-spacerun: yesnbsp; /SPANYou would think a senior economist at the ?xml:namespace prefix = st1 ns = urn:schemas-microsoft-com:office:smarttags /st1:place w:st=onst1:PlaceName w:st=onTax/st1:PlaceName st1:PlaceName w:st=onPolicy/st1:PlaceName st1:PlaceType w:st=onCenter/st1:PlaceType/st1:place would have no trouble answering that question. But it is not so simple./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptThis question has come up in the debate over the proposal to require all Americans to have medical insurance—a provision in all of the major congressional health reform bills. If you must buy insurance, is the payment you make a tax or just a premium for insurance coverage?SPAN style=mso-spacerun: yesnbsp; /SPANIs the penalty imposed on those who don’t buy insurance a tax or a fine for failing to comply with the law?/SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptOf course, we know taxes are what we pay to fund the general activities of the government. And for most taxes, including the individual income tax, what we pay bears little relationship to how much we benefit from government services.SPAN style=mso-spacerun: yesnbsp; /SPANBut not all payments to governments are for broad public services and some levies, such as airline ticket taxes, are associated with direct consumption of a service by the payer. SPAN style=mso-spacerun: yesnbsp;nbsp;/SPAN/SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptPayments to governments that are analogous to commercial transactions are counted as user fees, not taxes, and reduce measured spending on the public activity. Examples include the fees I pay when I visit a National Park or for getting my car emissions tested. Getting the emission test gives me a lot less pleasure than hiking in st1:place w:st=onst1:PlaceName w:st=onShenandoah/st1:PlaceName st1:PlaceType w:st=onPark/st1:PlaceType/st1:place, but it is a requirement I must meet for the privilege of driving. And since I am the potential polluter, the state requires me to bear the cost./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptSo when is a payment to government by users of a service a tax and when is it a fee?SPAN style=mso-spacerun: yesnbsp; /SPANA 1993 A href=http://www.cbo.gov/ftpdocs/104xx/doc10417/1993_08_growthofuserchargesa)taxes.pdfFONT color=#800080CBO report/FONT/A cited Malcolm Baldrige, a Commerce Secretary during the Reagan Administration. “I think it is simple,” Baldrige commented.SPAN style=mso-spacerun: yesnbsp; /SPAN“If it is a Democratic proposal, it is a tax; if it is Republican, it is a user fee.”SPAN style=mso-spacerun: yesnbsp; /SPANOf course, Baldrige was joking, but nonetheless user-related taxes are often hard to distinguish from user fees.SPAN style=mso-spacerun: yesnbsp; /SPANIf my local community funds trash collection out of property tax revenues, total tax collections look higher than if they charge me a separate fee for trash collection (even if the fee is collected when I pay my property tax).SPAN style=mso-spacerun: yesnbsp; /SPANUsing federal gasoline taxes to finance interstate highways makes the tax burden look higher than if those roads, like some older state highways, were paid for by tolls./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptThe 1993 CBO report cites four categories of user-related charges:SPAN style=mso-spacerun: yesnbsp; /SPANuser fees, regulatory fees, beneficiary-based taxes, and liability-based taxes. SPAN style=mso-spacerun: yesnbsp;/SPANIn general, fees are distinguished from taxes by the degree of connection between the payment and the service received or social cost imposed by the payer. Thus, payments to the black lung fund are considered a liability-based tax because, although payments to miners result from past activities of the coal industry, they are not closely linked to the current actions of any firm on which the impost is based. In contrast, charges for food safety inspections are a regulatory fee, because (assuming the cost is passed forward) food consumers who are the beneficiaries of the inspection activities are paying for it. Often, however, a particular levy can be classified on either side of the tax/fee line./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptSo what are payments for mandatory health insurance?SPAN style=mso-spacerun: yesnbsp; /SPANThey are involuntary and not based on something the person chooses to do, which makes them look like a tax.SPAN style=mso-spacerun: yesnbsp; /SPANHowever, the individual gets a benefit –insurance coverage – in exchange for the payment, which sounds like a fee. Because of subsidies, some individuals will pay more than others for the same coverage (tax).SPAN style=mso-spacerun: yesnbsp; /SPANAnd if the individual fails to buy insurance, she must make a payment to the IRS, for which she will get nothing directly in exchange (tax). But the payment can be viewed as a regulatory fine for failing to meet a public responsibility (fee).SPAN style=mso-spacerun: yesnbsp; /SPANFinally, because the IRS is administering these payments, it looks very much like (and will likely be scored as) a tax./SPAN/P
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P class=MsoNormal style=MARGIN: 0in 0in 0ptSPAN style=FONT-SIZE: 9pt; FONT-FAMILY: Verdana; mso-bidi-font-size: 12.0ptAs a tax economist, parsing these questions is fascinating. But I’m not sure it is very important to the health debate. Instead, we’d be better off asking a different set of questions: Who would bear the net costs of this mandate by paying more than the value of insurance they receive?SPAN style=mso-spacerun: yesnbsp; /SPANWho would benefit by receiving insurance in excess of the amount they pay?SPAN style=mso-spacerun: yesnbsp; /SPANIs this income redistribution desirable?SPAN style=mso-spacerun: yesnbsp; /SPANIs it the best way to pay for (near) universal coverage?SPAN style=mso-spacerun: yesnbsp; /SPANAnd is that goal worth the cost?SPAN style=mso-spacerun: yesnbsp; /SPANIf we like the answers, we should support reform and if we don’t we should oppose it, regardless of whether we label the payments “tax” or “fee”./SPAN/P
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