Legal Gimmickry Rescues Obama
Euro Pacific Capital, Inc.
Posted Jul 4, 2012
Despite the celebrations among Democrats, yesterday a majority of Supreme Court justices ruled that the Constitution does not allow the government to force Americans to buy health insurance. However in providing the swing vote to uphold the Affordable Care Act (aka Obamacare) Chief Justice John Roberts broke with the four other justices who shared that view by declaring that the methods chosen to get individuals to buy insurance were not penalties but taxes. He declared that the government wasn't legislating behavior, but simply taxing it. In reaching this tortured decision he erred by declaring the penalties to be taxes and then compounded the mistake by classifying them as "indirect taxes" that are not imposed on individuals. Apparently Roberts feels that these two wrongs will make a right. But his mistake will cost this country dearly.
The Obama administration admits that because the law makes it illegal for insurance companies to discriminate based on pre-existing conditions it eliminates the incentive for healthy people to buy insurance. Any rational healthy person would simply forego expensive insurance until they were old enough or sick enough to actually need it. Since insurance companies need the money they make from healthy people to compensate for the money they lose from sick people, the plan would collapse if the government did not devise a mandate that would convince or compel all individuals to buy insurance.
In selling the plan to the public, President Obama repeatedly claimed that these burdens were penalties, not taxes. In addition to the stated intent of the lawmakers, the standard legal definitions that separate taxes from penalties make it clear that the new financial burdens are penalties, not taxes. A tax is an exaction to raise revenue. If its primary purpose is to compel behavior then it is considered a penalty.
But Roberts argued that since the "tax" on not buying is lower than the actual cost of insurance, then the penalty will not force anyone to buy. He did not specify a level at which the "tax" would become determinative thereby becoming an unconstitutional penalty. However, since Congress can raise the tax anytime it wants, the mechanism is already in place for it to do exactly what the Supreme Court ruled it can't. Does Roberts expect to review the case every time Congress raises the penalty? The fact that Roberts feels that the penalty is ineffective is irrelevant. It is not the Court's job to judge the efficacy of legislation, just its constitutionality.
Robert's conclusion that the Federal government can't require that people buy health insurance but can impose a tax on those who don't is a distinction without a difference. After all, if the tax was high enough, individuals would have no choice but to comply. It has been clearly established that Congress can't do with the tax code what it lacks the constitutional authority to do with legislation. That is why the Constitution had to be amended in order to ban the sale of alcohol. Prohibition would have been much easier to achieve by simply raising alcohol taxes sufficiently to eliminate its sale. But such a tax would have been unconstitutional. The same principal applies to health insurance. Congress can't simply use taxes to force Americans to buy health insurance.
Even if you buy Robert's logic that the penalty is a tax, he still should have ruled it unconstitutional because all direct taxes, except income taxes as described by the 16th Amendment, must be apportioned. The government's power to tax is not absolute. Taxes fall into two classes, direct and indirect, and there are specific rules for each. Alcohol and tobacco taxes are indirect taxes, and are subject to the rule of uniformity. You only pay them if you buy the products, and you do so indirectly through the merchants who sell them. If you do not buy the products you pay nothing.
However, the only way to avoid paying the tax for not buying health insurance is to buy a product that you do not want. So either way you pay. And since the taxpayer pays the tax directly to the government, it's a direct tax, which must be apportioned by state according to each state's percentage of the nation's total population.
Roberts allowed the government to free itself from this straightjacket by redefining the meaning of a direct tax. He asserted that the tax for not buying health insurance is indirect because it affects not all Americans but only those who fail to buy health insurance and who have sufficient income to pay. But the percentage of people who are subject to a tax has nothing to do with the class to which it belongs. The 19th Century income tax was declared unconstitutional because it was an unapportioned direct tax. The fact that less than 2% of the population was initially subject to it was beside the point.
As with Prohibition, to impose an unapportioned direct income taxes on individuals the government had to pass the 16th Amendment to the Constitution. It should have to do it again for a direct tax on those who fail to buy health insurance.
The Supreme Court has ruled (incorrectly in my opinion) that estate and gift taxes fall into the category of indirect taxes, even though they are paid directly to the government. The court ruled that these are not direct taxes on individuals, but excise taxes levied on the privilege of giving gifts or bequeathing property. They could try to apply the same twisted logic to health insurance, but it would be quite a stretch to classify the right not to buy health insurance as a privilege.
In the final analysis, since the court ruled that the government cannot force Americans to buy health insurance, and that the stated purpose of the Affordable Care Act is to do precisely that, it is clearly unconstitutional, regardless of the legal trickery the court used to declare otherwise.
If the government had tried to slip an unconstitutional penalty by the Court by disguising it as a tax, then Obama may have been on the wrong end of yesterday's decision. Instead he chose a losing argument but Roberts found a loophole to uphold it anyway. Despite his stated preference for restraint, this is the ultimate in judicial activism. This awful ruling makes it more evident that the ballot box provides the only remedy for freedom loving Americans.
For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. Click here for your free subscription.
to buy Peter Schiff's best-selling, latest book, "How
an Economy Grows and Why It Crashes."
For a more in depth analysis of our financial problems and the
inherent dangers they pose for the US economy and US dollar,
you need to read Peter Schiff's 2008 bestseller "The
Little Book of Bull Moves in Bear Markets" [buy
here] And "Crash Proof 2.0: How to Profit from the
Economic Collapse" [buy
For a look back at how Peter
Schiff predicted the current crisis, read his 2007 bestseller
"Crash Proof: How to Profit from the Coming Economic
More importantly, don't wait
for reality to set in. Protect your wealth and preserve your
purchasing power before it's too late. Discover the best way to buy gold at
www.goldyoucanfold.com, and subscribe to
our free, on-line investment
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.