Tax vs. Fee in Health Insurance Mandate – Why Politicians Care But Shouldn’t

October 1, 2009

This entire debate over the tax/fee/fine distinction regarding individuals and health insurance may be telling us something. Via revealed preference, we can see that politicians hate calling something a tax. But why would politicians like President Obama not like calling something a tax? (They should know that it’s all a red herring.) The obvious answer to why self-interested politicians would care is that voters care. Voters perceive a difference between something when it is called a tax versus when it is called a fine or fee.

This is likely why supporters of climate change legislation chose cap-and-trade over a carbon tax, and why the opponents have latched on to the term “cap-and-tax.” It’s also why raising CAFE standards are so popular among the general public as opposed to increases in the gasoline tax (which would be far superior).

This tax/fee/fine distinction debate should be left to the lawyers (and sometimes policymakers) for their use in those cases where it matters (like state constitutional provisions relating to taxes). For the rest of society, some basic economic education as to why it really doesn’t matter from a policy outcome perspective sounds like the right prescription.

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