Not the Power to Destroy: An Effects Theory of the Tax Power

The Supreme Court’s “new federalism” decisions impose modest limits on the regulatory authority of Congress under the Commerce Clause. According to those decisions, the Commerce Clause empowers Congress to use penalties to regulate interstate commerce, but not to regulate noncommercial conduct. What prevents Congress from penalizing non-commercial conduct by calling a penalty a tax and invoking the Taxing Clause? The only obstacle is the distinction between a penalty and a tax for purposes of Article I, Section 8. In National Federation of Independent Business v. Sebelius (NFIB), the Court considered whether the minimum coverage provision in the Patient Protection and Affordable Care Act (ACA) imposes a penalty or a tax by requiring most individuals to either buy health insurance or make a payment to the Internal Revenue Service. Writing for the Court, Chief Justice Roberts concluded that the minimum coverage payment is a tax for constitutional purposes, even though Congress called it a penalty. This Article develops an effects theory to distinguish between penalties and taxes. The authors believe that it provides the best theoretical justification of the tax-power holding in NFIB. The effect of a penalty is to prevent conduct, thereby raising little revenue, whereas the effect of a tax is to dampen conduct, thereby raising revenue. Three opposing characteristics of an exaction give incentives for preventing or dampening conduct, and thus provide criteria for distinguishing between penalties and taxes. A pure penalty condemns the actor for wrongdoing; she must pay more than the usual gain from the forbidden conduct; and she must pay at an increasing rate with intentional or repeated violations. Condemnation coerces expressively and relatively high rates with enhancements coerce materially. Alternatively, a pure tax permits a person to engage in the taxed conduct; she must pay an exaction that is less than the usual gain from the taxed conduct; and intentional or repeated conduct does not enhance the rate. Permission does not coerce expressively and relatively low rates without enhancements do not coerce materially. The ACA’s required payment for non-insurance has a penalty’s expression and a tax’s materiality. Its constitutional identity depends on the reasonable expectations of Congress concerning its effect. If Congress could have reasonably concluded that the exaction will dampen—but not prevent—the general class of conduct subject to it and thereby raise revenue, then courts should interpret it as a tax regardless of what the statute calls it. If Congress could have reasonably concluded only that the exaction will prevent the conduct of almost all people subject to it and thereby raise little or no revenue, then courts should interpret it as a penalty. In the case of the minimum coverage provision, the Congressional Budget Office predicts that the exaction for non-insurance will dampen uninsured behavior but not prevent it, thereby raising several billion dollars in revenue each year. Accordingly, the exaction is a tax for purposes of the tax power

Theorizing the Law/Politics Distinction: Neutral Principles, Affirmative Action, and the Enduring Insight of Paul Mishkin

Early in his career Mishkin saw that the law could be apprehended from two distinct and in part incompatible perspectives: from the internal perspective of a faithful practitioner and from the external perspective of the general public. If the social legitimacy of the law as a public institution resides in the latter, the legal legitimacy of the law as a principled unfolding of professional reason inheres in the former. Mishkin came to believe that although the law required both forms of legitimacy, there was nevertheless serious tension between them, and he dedicated his scholarly career to attempting to theorize this persistent but necessary tension, which he conceived almost as a form of antinomy. In this article we pay tribute to Mishkin\u27s quest for understanding. We argue that the tension identified by Mishkin is significant and unavoidable, but that it is also exaggerated because it presupposes an unduly stringent separation between professional reason and popular values. In our view the law/politics distinction is both real and suffused throughout with ambiguity and uncertainty. The existence of the law/politics distinction creates the possibility of the rule of law, but the ragged and blurred boundaries of that distinction vivify the law by infusing it with the commitments and ideals of those whom the law purports to govern

Not the Power to Destroy: An Effects Theory of the Tax Power

The Supreme Court’s “new federalism” decisions impose modest limits on the regulatory authority of Congress under the Commerce Clause. According to those decisions, the Commerce Clause empowers Congress to use penalties to regulate interstate commerce, but not to regulate noncommercial conduct. What prevents Congress from penalizing non-commercial conduct by calling a penalty a tax and invoking the Taxing Clause? The only obstacle is the distinction between a penalty and a tax for purposes of Article I, Section 8. In National Federation of Independent Business v. Sebelius (NFIB), the Court considered whether the minimum coverage provision in the Patient Protection and Affordable Care Act (ACA) imposes a penalty or a tax by requiring most individuals to either buy health insurance or make a payment to the Internal Revenue Service. Writing for the Court, Chief Justice Roberts concluded that the minimum coverage payment is a tax for constitutional purposes, even though Congress called it a penalty. This Article develops an effects theory to distinguish between penalties and taxes. The authors believe that it provides the best theoretical justification of the tax-power holding in NFIB. The effect of a penalty is to prevent conduct, thereby raising little revenue, whereas the effect of a tax is to dampen conduct, thereby raising revenue. Three opposing characteristics of an exaction give incentives for preventing or dampening conduct, and thus provide criteria for distinguishing between penalties and taxes. A pure penalty condemns the actor for wrongdoing; she must pay more than the usual gain from the forbidden conduct; and she must pay at an increasing rate with intentional or repeated violations. Condemnation coerces expressively and relatively high rates with enhancements coerce materially. Alternatively, a pure tax permits a person to engage in the taxed conduct; she must pay an exaction that is less than the usual gain from the taxed conduct; and intentional or repeated conduct does not enhance the rate. Permission does not coerce expressively and relatively low rates without enhancements do not coerce materially. The ACA’s required payment for non-insurance has a penalty’s expression and a tax’s materiality. Its constitutional identity depends on the reasonable expectations of Congress concerning its effect. If Congress could have reasonably concluded that the exaction will dampen—but not prevent—the general class of conduct subject to it and thereby raise revenue, then courts should interpret it as a tax regardless of what the statute calls it. If Congress could have reasonably concluded only that the exaction will prevent the conduct of almost all people subject to it and thereby raise little or no revenue, then courts should interpret it as a penalty. In the case of the minimum coverage provision, the Congressional Budget Office predicts that the exaction for non-insurance will dampen uninsured behavior but not prevent it, thereby raising several billion dollars in revenue each year. Accordingly, the exaction is a tax for purposes of the tax power

Collective Action Federalism: A General Theory of Article I, Section 8

The Framers of the United States Constitution wrote Article I, Section 8 in order to address some daunting collective action problems facing the young nation. They especially wanted to protect the states from military warfare by foreigners and from commercial warfare against one another. The states acted individually when they needed to act collectively, and Congress lacked power under the Articles of Confederation to address these problems. Section 8 thus authorized Congress to promote the “general Welfare” of the United States by tackling many collective action problems that the states could not solve on their own. Subsequent interpretations of Section 8, both outside and inside the courts, often have focused on the presence or absence of collective action problems involving multiple states—but not always. For example, the Supreme Court of the United States, in trying to distinguish the “truly national” from the “truly local” in the context of the Commerce Clause, United States v. Morrison, 529 U.S. 598, 617–18 (2000), has differentiated “economic” activity, which Congress may regulate, from “noneconomic” activity, which Congress may not regulate. A federal constitution ideally gives the central and state governments the power to do what each does best. Economic activity does not generally cause collective action problems among the states, and noneconomic activity is not generally free from collective action problems. Consequently, Congress is not generally better at regulating economic activity, and the states are not generally better at regulating noneconomic activity. The distinction between economic and noneconomic activity seems mostly irrelevant to the problems of federalism. We propose a better foundation for American federalism in Section 8. Our theory distinguishes activities that pose collective action problems from those that do not. This approach flows directly from the relative advantages of the federal government and the states. We show that Section 8 mostly concerns collective action problems created by interstate externalities and national markets. We conclude that Section 8 authorizes Congress to tax, spend, and regulate to solve these collective action problems. Collective action federalism finds that the limits and expanse of congressional power in Section 8 turn on the difference between individual and collective action by the states. The theory uses this distinction to differentiate interstate commerce from intrastate commerce, not the economic/noneconomic distinction. Our distinction best explains why Congress may not ordinarily use its commerce power to regulate such crimes as assault or gun possession in schools. Collective action federalism also identifies a constitutional “hook” for Congress to regulate multi-state problems of collective action that may not involve commerce: Clause 1 of Section 8 authorizes some forms of regulation of noneconomic harms that spill over state boundaries, such as contagious diseases and certain kinds of environmental pollution

The Value of Waiting to Invest

This paper studies the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous-time stochastic processes. The optimal time to invest and an explicit formula for the value of the option to invest are derived. The rule "invest if benefits exceed costs" does not properly account for the option value of waiting.Simulations show that this option value can be significant, and that for surprisingly reasonable parameter values it may be optimal to wait until benefits are twice the investment cost. Finally, we perform comparative static analysis on the valuation formula and on the rule for when to invest.

Transient Heat Transfer in a Semitransparent Radiating Layer with Boundary Convection and Surface Reflections

Surface convection and refractive index are examined during transient radiative heating or cooling of a grey semitransparent layer with internal absorption, emission and conduction. Each side of the layer is exposed to hot or cold radiative surroundings, while each boundary is heated or cooled by convection. Emission within the layer and internal reflections depend on the layer refractive index. The reflected energy and heat conduction distribute energy across the layer and partially equalize the transient temperature distributions. Solutions are given to demonstrate the effect of radiative heating for layers with various optical thicknesses, the behavior of the layer heated by radiation on one side and convectively cooled on the other, and a layer heated by convection while being cooled by radiation. The numerical method is an implicit finite difference procedure with non-uniform space and time increments. The basic method developed in earlier work is expanded to include external convection and incident radiation