Unbounded
Posted by aogTuesday, 27 March 2012 at 22:24 TrackBack Ping URL

As I listen to the arguments about POR-care I am struck by how little concern about legal limits its backers have. It seems to me that the gist of their argument is “the government needs to regulate health care therefore anything it does in that area is Constitutional”. For instance, Walter Dellinger, the Duke law professor who supports the law, pointed out that the plaintiffs effectively made it clear that the only way to create national health insurance would be through a single-payer system. That’s not a legal argument, that’s a pure policy argument.

From the same article we have

As somebody who knows the policy issues, the hearing was incredibly frustrating to watch. Both judges and lawyers, on both sides, seemed not to understand the specifics of the health care market and why it would (or would not, depending on your legal philosophy) make the mandate constitutional.

Am I the only one who finds this point laughably obtuse? No economic feature of health care or specifics thereof can make the insurance mandate Constitutional or not and to think otherwise is to not understand law.

Other arguments are about cost shifting, free-riders, and other purely economic points. I think this is why the arguments are going badly before the Supreme Court because fundamentally they don’t make legal sense. I don’t think the POR axis grasped this because to them there is no limit to their power, only policy questions about what to do.

Comments — Formatting by Textile
M. Tuesday, 03 April 2012 at 18:39

The entire argument is asinine. It’s a dispute over language alone. Had Congress used the term “tax” instead of “fee”, even the Republican legal counsel agrees that the Supreme Court wouldn’t even have a case to hear. Instead, we’re subjected to endless, tiresome droning about the burdens of this awful “mandate”. Feh.

Annoying Old Guy Tuesday, 03 April 2012 at 18:59

Why wasn’t it called a “tax”, then? Is your claim the Pelosi-Obama-Reid axis is so stupid as to endanger the entire legislation for a euphemism? That’s harsh.

Bret Tuesday, 03 April 2012 at 20:32

aog,

I think they assumed it would easily pass constitutional muster.

I think that argument is partly right. It seems likely to me that the tax code could tax someone with a certain income with health insurance $x and someone with the same income and no health insurance $x + $y which would essentially be a tax break for those who had health insurance.

But Obamacare is not a tax bill so they didn’t decide to call it a tax and I think this was partly to insulate it from future congressional fiddling with taxes. Because of that it’s not really a tax and is therefore subject to different constitutional constraints and that’s why the argument is partly wrong.

At least that’s how I see it.

Hey Skipper Tuesday, 03 April 2012 at 21:54
As somebody who knows the policy issues …

I think that qualifies as an exact example of “taking as true that which desperately needs proving”.

At the considerable risk of undue and unearned self-esteem on this issue, I have become convinced that those such as Dellinger have become so immersed in policy details (which, when you get right down to it, are collectivist porn) that they have a woodpecker’s view of the forest.

Sticking to the point, though, it is worth remembering that the passage of Obamacare was a travesty of the legislative process. IIRC, there was no reconciliation between the Senate and HoR versions. Most tellingly, though, the ACA could have been completely constitutional had the Dems and Obama come clean and use the “t” word. Unfortunately, they new that if they came clean and let the serfs know what this thing was going to cost (note the pushing of many costs out to 2014) it would have sunk like a greased safe.

Health care provision essentially has three related but separable problems: cost, coverage and affordability. Addressing the first two first makes the last easier.

Unfortunately, doing so doesn’t require an advanced degree in knowing policy issues.

Annoying Old Guy Tuesday, 03 April 2012 at 22:40

I agree with Skipper that it wasn’t called a tax because it was clear that was a political loser and would never pass. I find it mordantly amusing that proponents of POR-care now treat that flagrantly unaccountable action as a feature that should increase the Constitutionality of the legislation. Pathetic, really.

M. Wednesday, 04 April 2012 at 06:00

Unfortunately, the “mandate” is mandatory for any sort of health care reform to work. It starts with the part of the bill that mandates that insurance companies must take all comers. This is hugely popular. But, of course, you cannot mandate that insurance companies take all comers without also mandating that everyone participate, else only the sick people get insurance and the companies go out of business. In short, the major, popular plank of the bill necessitates the other major, but unpopular one. If the individual mandate alone gets struck down, expect an uprising from the insurance companies, who cannot survive without it.

Annoying Old Guy Wednesday, 04 April 2012 at 07:17

M.;

Unfortunately, the “mandate” is mandatory for any sort of health care reform to work.

Not at all. For instance you could achieve major reform simply by tweaking the tax code to eliminate the preference for employer supplied health insurance. That ameliorate cost growth and eliminate portability issues. A mandate is a cheap hack created by people who don’t want to make the effort to come up with real solutions.

It starts with the part of the bill that mandates that insurance companies must take all comers. This is hugely popular.

I am sure requiring Porsche to give out free cars would be hugely popular too. Strangely, though, this hasn’t translated to popularity for POR-care. Perhaps people are smart enough to realize who is really going to be paying for this.

you cannot mandate that insurance companies take all comers without also mandating that everyone participate, else only the sick people get insurance and the companies go out of business.

You’re skipping over the type of insurance issue as well. Implicit in this is that the government must then control the contents of the insurance, or you have the same problem of people switching opportunistically. That kind of government control over nominally private corporations is called “fascism”. So much for “if you like your plan you can keep it”.

If the individual mandate alone gets struck down, expect an uprising from the insurance companies, who cannot survive without it.

There’s a strong Constitutional argument for you! As I noted, this is eventually where the pro-POR-care arguments end up. You sound like a house siding salesman.

P.S. Still waiting for your explanation of the “tax” vs. “not a tax” issue. May I presume you’re OK with the “yes, they’re really that stupid” point of view, and that you trust them to write workable legislation despite that handicap?

Bret Wednesday, 04 April 2012 at 09:31

Hey Skipper and aog,

So if it were called a tax instead, but had the same end effect, you’d think it was constitutional?

Annoying Old Guy Wednesday, 04 April 2012 at 11:00

It would still depend on the details. I think if it were structured as it is now, but just called a tax, it would still be unconstitutional. However if were structured where everyone is taxes (even if progressively) and the federal government then used the proceeds to buy health insurance for people, I think that would be constitutional. OTOH I think almost all current Commerce Clause case law is unconstitutional — if it’s not actual commerce between states that I don’t see the federal government has jurisdiction. And by law, health insurance is not between states.

erp Wednesday, 04 April 2012 at 13:42

Lefties want universal health care funded by tax payers and run by public sector unions and lunatic lefty bureaucrats. That’s why they are deliberately confusing the issue by equating health insurance with health care and why the Supreme Court was allowed to take up the case before the election. It’s done deal that Obamacare will be struck down making way for a truly monstrous takeover after Obama is re-elected which is pretty much a surety since there are no conservatives running to reverse our long slide down the black hole of socialism.

Bret Wednesday, 04 April 2012 at 14:19

aog,

And what if it was that the tax code would tax someone with a certain income with health insurance $x and someone with the same income and no health insurance $x + $y which would essentially be a tax break for those who had health insurance?

Annoying Old Guy Wednesday, 04 April 2012 at 14:59

Bret;

The tricky is bit is defining “health insurance”. Is it any policy? Is it a dollar for dollar, or some ratio of money spent on health care? Is it health insurance purchased from specific vendors?

In contrast to the current mandate and its claimed Constitutional basis (Commerce Clause) which IMHO is flat out bogus, a tax policy as you bring up is far more debatable and depends quite a bit on the details. You might take note of some of the arguments during this case about the dividing line between Necessary and Proper actions and actions that are similar but eviscerate some other Necessary and Proper part of the Constitution particularly in regard to federal funding mandates to states. The Justices, as far as I can tell, take the position that while such things are basically OK there are limits even there to federal power. I would take the taxing situation to be similar.

Hey Skipper Wednesday, 04 April 2012 at 16:18
Not at all. For instance you could achieve major reform simply by tweaking the tax code to eliminate the preference for employer supplied health insurance.

Speaking as someone who benefits hugely from this, I couldn’t agree more.

It never ceases to astonish that the economic ineptitude of post-WWII Congress continues to plague us with what, employing even the minimal sentience granted to my dog, is clearly insane.

Of course, the unions, proving once again they are nothing more than rent seeking cartels, demonstrated they are dumber than a moderately challenged golden retriever.

So if it were called a tax instead, but had the same end effect, you’d think it was constitutional?

Here is how it could have been constitutional: 1. Eliminate the tax advantage of employer “provided” health care by calling it what it clearly is: a purchased good in lieu of salary. (IANAL, but I think there is a long standing equal protection issue here that makes this part of the tax code wildly unconstitutional.) 2. Provide a tax deduction for individually purchased health coverage up to some amount per person (I would be OK if the credit was mildly progressive; i.e., those who earn more get less of a credit).

Of course, that would require raising taxes to make up for the deduction, thereby putting the cost of this thing up front for everyone to see.

AVeryRoughRoadAhead - Winter is coming... Thursday, 05 April 2012 at 00:16

Just eliminate any deduction for health insurance premiums, regardless of how coverage is provided or by whom purchased.

There would still be a bias towards group coverage for the obvious reasons, but at least the tax-related distortions would be gone.

Stop allowing mortgage interest deductions as well.

Hey Skipper Thursday, 05 April 2012 at 13:12
Stop allowing mortgage interest deductions as well.

So, no mortgage interest deduction for owner occupied housing, while those who own rental properties get a deduction? How does that make sense?

Bret Thursday, 05 April 2012 at 13:54

I’m surprised at the question.

Generally businesses (whether or not corporations, partnerships, or sole-proprietorships), including businesses such as rental property businesses, can deduct expenses required to ultimately generate a profit or gain (on which they’ll pay taxes), including interest expenses, before calculating those taxes.

Generally individuals can not deduct costs of living such as rent, credit card interest, automobile expenses, etc. If they could, everybody would make sure to spend every last dime they earned in order to avoid paying any taxes. That wouldn’t be good.

So from my point of view (and apparently Rough’s as well), mortgage interest deduction is an odd and glaring exception.

AVeryRoughRoadAhead - Winter is coming... Friday, 06 April 2012 at 09:31

Just so - what Bret said. Rental property owners also get to claim depreciation on those homes, whereas owner-occupiers get nothing.

Hey Skipper Friday, 06 April 2012 at 14:31

Bret — what you are describing is a consequence of taxing income. Of course rentiers get to deduct all manner of costs because in order to determine net, as opposed to gross, income.

However, that still leaves several points completely untouched.

Why should rentiers enjoy a total (rather than merely extensive) tax advantage over owner-occupiers? Both are in the business of providing housing, after all: an owner occupier is engaged in precisely the same economic activity as a rentier; the only difference is address.

This points out why housing is a different than other businesses. In every other case I can think of offhand, economic activity consists of consuming the product of someone else’s efforts. And where that isn’t the case, say Bret being in the business of building robotic devices, the distinction between his business efforts and other’s consumption thereof is completely clear. Yet in the case of housing, this distinction is completely non-existent, yet despite that already distinctly favors rentiers over owner-occupiers. When a rentiers sell properties, they get to deduct the depreciated costs of improvements to those properties. Yet when owner occupiers make exactly the same improvements, and conduct exactly the same transactions, they don’t.

It is odd that so many people reflexively consider the mortgage interest deduction for owner occupiers a subsidy, while completely ignoring the far more extensive tax breaks for rentiers. After all, if renters are subsidizing home ownership through paying higher taxes to compensate for owner-occupiers lower taxes, that logic must cut both ways. Renters pay less because all the business expense deductions rentiers get to claim mean a lower gross income will produce a given net income, which is why rentiers are in the business in the first place.

Given that rentiers are already extensively favored for doing exactly the same thing as owner occupiers, what would be the consequences of making that even more complete? I don’t completely buy into the mantra about the societal benefits of home ownership that led to the CRA debacle, but they aren’t non-existent. Does it make sense to further penalize owner-occupiers for their self sufficiency?

I think you are both looking at this completely backwards. Since the economic activity — providing housing — is exactly the same for rentiers and owner-occupiers, then the tax code should treat them exactly the same.

So, by all means, eliminate the mortgage interest deduction, and every other break, for both.

erp Friday, 06 April 2012 at 19:03

Skipper, amen to your last statement.

Bret Monday, 09 April 2012 at 10:35

Hey Skipper,

That’s a lot of words, but it’s not clear to me why you think the rentier has such an advantage over the home owner or why buying versus renting houses is any different than buying versus renting something else, say cars for example.

Consider the following example. A person buys a house for $250K, finances it with a no money down, 5 year balloon loan which has interest only payments of $1000/mo for 5 years. He does no maintenance but inflation happens to exactly offset the degradation of the house so at the end of 5 years he sells it for what he paid for it ($250K). He has substantial other income and between Fed and State taxes has a marginal tax rate of 50%.

In the first case, he chooses to live in the house which results in a tax subsidy of $500/mo or $6,000/yr or $30,000 for the five year period (50% of the mortgage payments).

In the second case, he rents the house out at $1,000/mo and lives in a second house or apartment that he rents for $1,000/mo. Interest and rental income balance out so that leaves depreciation. For the K1, assume active involvement. He can depreciate 2.5% per year, or $6,250/yr, so the tax subsidy would be $3,125. However, this changes the basis of the purchase price of the house, so at the end of 5 years he’ll show a profit of $31,250 on which he’ll have to pay taxes. So he basically gives the money back at that point. The tax subsidy is quite limited in this case.

So I’m just not seeing how the rentier is enjoying “a total (rather than merely extensive) tax advantage over owner-occupiers”. At least not in this case.

Hey Skipper Monday, 09 April 2012 at 13:09

Before getting into detailed hypotheticals, let’s get some of the general principles out of the way.

You say he chooses to live in the house which results in a tax subsidy of $500/mo or $6,000/yr or $30,000 for the five year period. In order for this to be a subsidy, to this homeowner, others are doing the subsidizing. Who are they?

AVeryRoughRoadAhead - Winter is coming... Monday, 09 April 2012 at 16:29

an owner occupier is engaged in precisely the same economic activity as a rentier; the only difference is address.

They are engaged in similar activity, but not the same.

Rentiers assume many risks that owner-occupiers (presumably) do not: unreimbursed damage to the property by the occupiers, refusal to pay the rent… In some states, it can take over a year to evict non-paying tenants.

When rentiers sell properties, they get to deduct the depreciated costs of improvements to those properties. Yet when owner occupiers make exactly the same improvements, and conduct exactly the same transactions, they don’t.

Under current tax law, rentiers deduct depreciation from current taxable income, but pay taxes on capital gains when selling, INCLUDING tax on the previously deducted depreciation - although at long-term capital gain rates.

Homeowners pay NOTHING on the first $250,000 - $500,000 of gains when selling, and can repeat such tax-excluded gains every two years.

It’s not at all clear to me that rentiers are getting a better deal than are owner-occupiers.

Bret Tuesday, 10 April 2012 at 11:26

Hey Skipper,

Why does it matter for the purposes of this discussion who does the subsidizing? Sounds like a tangential and distracting detail - in other words, a change of subject.

My claim that you seem to disagree with is that mortgage interest deduction is an exception to the otherwise consistent line between what a private individual can deduct and what a business can deduct. If you don’t like the word “subsidy”, substitute in “tax reduction”.

Hey Skipper Tuesday, 10 April 2012 at 15:31

Bret:

It matters because a subsidy is a specific thing: it must transfer resources from one group of people to a distinctly different group of people. The MAL is fond of calling “tax breaks” to oil companies corporate subsidies. But, even granting the original charge that oil companies are getting preferential treatment in the tax code, those breaks cannot be a subsidy, because everyone uses energy, and energy prices are lower because of those “tax breaks”.

Just so here. The mortgage tax deduction cannot be a subsidy unless you can specify two distinct groups betwen which money is transferred. As it happens, those two groups do exist. Once you identify them, you will see why I insist the mortgage interest deduction should not belong to the class of things that businesses can deduct, but private individuals cannot. (Rough, this will also answer why I think the activities are identical; the extent risks exist for rentiers, they are priced into rent.) And, further, why eliminating the mortage interest deduction for owner-occupiers must have the consequence of even further favoring rentiers, and will also then constitute a far less justifiable subsidy than what currently exists.

As for your hypothetical, I have a couple problems. First, the marginal tax rate upon which the mortgage deduction only go up to 35%, and one has to be doing darn well to get there. Second, it introduces complications where none need exist (inflation, degradation).

So try this one. My brother and I each buy dwellings each as owner occupiers, then sell them after some period of time. Now, reset the tape, and this time I buy my brother’s dwelling and rent it to him, and he does the same for me. To make matters easy, let’s say both dwellings are identical houses, next door to each other in a subdivision, and they receive equal amounts of residential nurturing.

Why is it the second arrangement should obtain a substantial tax advantage over the first? (To use very round numbers, on $500,000 loans and a 33% tax bracket, over 10 years that advantage works out to be something like $60,000. ($18,000 per year in interest payments; $6,000 deduction per year, 10 years.)

It isn’t clear to me rentiers are getting a better deal than owner-occupiers.

Rentiers get to depreciate capital investment regardless of capital gains or losses. An owner occupier does not. As an owner occupier, If I spend, say, $30,000 in repairs (a new driveway and roof will get there easily), I can’t deduct any of that from any gain I make on the property when I sell it, nor, unlike a rentier, can I deduct it from my income. That is why I think rentiers are getting a better deal. Additionally, there would seem to be the self evident case that if the deduction wasn’t a better deal than its absence, it either wouldn’t exist in the first place, or no one would use it.

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