Taxes you already pay for things that you do not buy

It's been almost a week since the Supreme Court handed down their ruling on the constitutionality of the Affordable Care Act (aka "Obamacare"), and we're still digesting the impact of the ruling.

One acquaintance of ours whose opinion we respect has pointed out an observation that we don't believe is widely understood, which is that the majority opinion -- which declared the penalty on the individual mandate to be a tax and hence within the bounds of the legislative powers given to the federal government by the US Constitution -- serves to highlight the egregious nature of many other acts of Congress stretching back for decades.

In other words, he believes that one "silver lining" to the majority opinion may be the fact that if this decision makes the electorate angry about being taxed as a penalty for not buying something (in this case, health insurance), then perhaps they will wake up and become angry about the many other egregious taxes and penalties which legislators have been writing into laws for decades in order to "encourage" various types of behavior among the citizenry.

Taking this idea and running with it a little ways, we'd like to point out that the government in the US has a long history of imposing taxes and other financial penalties on people who don't do things that the government wants to encourage.  There are all kinds of laws already on the books (at the federal, state, and local levels) which tax people for "not buying things," just as this new law proposes to do to people who do not buy health care.

For example, the tax code has for many years given a very generous tax writeoff to citizens who choose to buy a house or condominium to live in and who take out a mortgage, rather than buying it outright ("with cash").  This can be thought of as the federal government saying, "We want you to mortgage your real estate.  If you do not, we are going to make you pay taxes which those who mortgage their real estate will not have to pay.  You will pay a higher level of tax than they will.  In other words, mortgage your house or pay a 'non-mortgage tax' as a penalty for not doing what we want you to do."  This has been going on for decades.

We have also pointed out in previous posts that the US government has imposed sugar tariffs on  imports of foreign sugar virtually non-stop since 1816 (which would make this a bi-partisan policy if there ever was one).  Because of this, citizens in the US pay higher prices for sugar than those in the rest of the world.  By imposing these sugar tariffs, the federal legislature has essentially been saying to citizens, "We want you to buy domestic sugar.  If you don't buy it, we will impose a tax on you."  Again, the decision of the Supreme Court last week highlights the fact that the government has been imposing taxes intended to coerce citizens into certain types of behavior for almost the entire history of the Republic (although no doubt the pace of such social engineering has increased since the beginning of the twentieth century).

One more recent example and one that should be familiar to many readers is the institution of "high-occupancy vehicle lanes" or "carpool lanes" in many freeways around the country (one such freeway is pictured above).  These lanes are open to those who carpool (sometimes defined as two or more people in one vehicle, and in other places defined as three or more people in one vehicle), as well as to certain other types of vehicles that governments want to encourage, such as hybrid vehicles, flexible-fuel vehicles, and motorcycles.  Other drivers are not allowed to use these lanes (and if they try to do so, the government will stop them by force in the form of a police officer).  

In this example, the government is saying to citizens, "We want you to buy certain types of vehicles, and if you don't, we will penalize you.  We will make you pay taxes for the construction and upkeep of freeways, and we will make some portions of those freeways off limits to you, while allowing others (who do buy those types of vehicles) to use them.  We will similarly tell you to carpool -- a behavior we want to encourage -- and if you do not, you will be in the same boat of paying taxes for something that others use but which you may not use."  

In other words, the government is already taxing people for not buying things, as well as for not following behaviors that the government wants to encourage in its citizenry.  In light of this, perhaps it is correct that the solution is not for the Supreme Court to shoot down such laws but rather for the people to realize that such government engineering always causes inefficiencies, malinvestment, and economic dysfunction, and for the electorate to demand that their legislators stop engaging in such practices.

What does all of this mean for investors?  We are under no illusion about the fact that the lawmakers in the US are not likely to stop creating tax incentives and penalties to encourage various behaviors (and to help various constituencies at the expense of others).  It is (remotely) possible that the recent Supreme Court decision will help voters wake up and realize how many ways the government already taxes them for things they do not buy or for actions that they do not take, and that this wake up call will have an impact on future elections.  

However, in light of the fact that such behavior will continue to go on, and in light of the fact that the Affordable Care Act for the time being remains on the books, we think the most likely result that investors should be aware of is the certainty of future inflation of the currency as part of the price tag for a system that will prove to be anything but affordable.  Inflation is in many ways the cruelest and the subtlest tax of all, as we have explained in previous blog posts such as "Stand still, little lambs, to be shorn!"

Because of this assessment, we would say that investors have no choice but to continue to look for innovation and opportunity wherever it can be found.