A Q-and-A with tax policy professor Joseph Thorndike.
The search for a historical analogy for HealthCare.gov, the Obama administration’s online health insurance marketplace that nearly imploded upon launch, usually ends with social security, Medicare or Medicare Part D, a prescription drug plan.
Those programs required building new bureaucracies and collecting information from large swaths of the nation’s citizens.
The first time the U.S. government managed a vast new program that required collecting information from large numbers of Americans, though, was the 1862 and 1913 income taxes, which marked their 100th and 150th anniversaries during the past two years.
Nextgov spoke last week with Joseph Thorndike, who directs the Tax History Project and teaches tax policy at the Northwestern University School of Law. He discussed how the Lincoln and Wilson administrations managed those new programs and whether there are any lessons for HealthCare.gov.
The transcript below is edited for length and clarity.
Are there similarities between the launch of Obamacare and HealthCare.gov and the federal income tax?
There are two places one might look for an analogy. One is in 1913 with the modern income tax, but also there’s much the same problem in 1862 with the real first income tax during the Civil War. In some ways that one was even a bigger problem because that was a brand new tax. We didn’t have an Internal Revenue Service or anything like it at the time. So they had to actually build, from the ground up, a new federal tax agency to collect not just income taxes but a whole slew of other new federal taxes as well.
Let’s start with 1862 then.
In many ways that’s the best contemporary comparison because they’re building this whole thing from scratch. I think it’s harder when you actually have to build the bureaucracy as well as everything else. That’s similar now. [The Health and Human Services Department] is in charge of [implementing Obamacare] in some ways but it is still an almost entirely new enterprise. In 1862 they had this problem, so they basically created the Internal Revenue Service. They hired one guy to be the commissioner and they had initially, I think, four employees. Within a few years they had thousands of employees because they had to step it up so quickly.
And it was rife with problems. No one knew what the rules were. They had to write all the rules for the first time. The concept of a tax sounds straightforward but in execution it’s extremely complicated because it’s not clear what counts as income and what you might be able to deduct from that. Many of these are settled issues 150 years later but in 1862 this was virgin territory.
So, on the one hand they had a bureaucratic problem in that they had to build the structures with which to collect all these new taxes. They had a lot of intellectual and conceptual problems too because they had to figure out how exactly this would work. Congress wrote a law but there were all sorts of wholes to be filled in.
What are differences between then and now?
I think the difference between then and now is that they had to build a bureaucracy that was huge in 1862, a lot of boots on the ground. In fact they said the law required an army of officials because there was no electronic anything and you had to have people out there to collect this stuff. That seems less true now because we are relying on electronic marketplaces to do this. There’s still a personnel problem, but it’s smaller.
What kind of new bureaucracy was required for the 1862 tax?
There were no computer systems out there so all this stuff was kept on ledger books. They had to hire income tax collectors. They also had assessors who would assess how much you owed. So they had to create all this enforcement mechanism too and spread it through the whole country during a war.
How did the Lincoln administration manage that?
They threw a lot of money at it. War makes that sort of thing easier. People are more on board for spending money in the middle of a war, especially in service of a war effort. I'd say that was the principal contribution.
What makes taxes different is a there’s a real imperative behind it. You’ve got to have the money. The government actually needs the money to fight the war and at a certain point you can’t borrow that money. So it succeeds because it has to succeed. On the other side, Obamacare might not succeed and half the people in the country will be just fine with that. And there’s not a catastrophe on the other side of that. You have a lot of uninsured people, you have a lot of insurance executives who took big risks, but you don’t have a catastrophe on the level of ‘we can’t put guns in the hands of our soldiers.’
I think that a revenue imperative, especially in the midst of a war, has a way of clearing obstacles out of the way. There was just much more unanimity of purpose. There were plenty of arguments going on in the 1860s about how to do things. But there wasn’t much of an argument about fighting the war and there’s not really much of an argument about providing the taxes to do it. That’s as opposed to health care, where half of lawmakers would be, at least ostensibly, very happy to see it fall on its face. So that’s a key distinction.
Did the program work in 1862?
It did. There were complaints all the way through the war. But the complaints are actually indications it was working quite well. People complained about having to pay taxes because they were actually paying taxes.
It wasn’t without its rough spots and its inequities and its corruption. No big bureaucracy employing thousands and thousands of people is going to be without problems. But, at the end of the day, it did what it had to do, which is raise a lot of money and allow them to fight the war. I think it was, on balance, a success. People disliked it enough that 10 years later they allowed it to expire. But that wasn’t because it had failed; it was because it had succeeded. It made enough money, they fought the war and they won the war and they didn’t need all that money any more so they were able to walk it back.
How does that compare to 1913?
The same thing could be said about 1913, although that was a smaller tax that only applied to something like 2 percent of the population. They didn’t have to collect money from that many people. The Bureau of Internal Revenue already existed so they didn’t have to create an entirely new institution. During World War I, the tax got broader but even then it only got up to something like 20 percent of the population.
There were lots of problems, especially about the complexity of the law. And the IRS was slow about getting out guidance and processing returns and promising refunds. It was your garden variety administrative sluggishness. But those were relatively minor problems. It’s not the collection of the tax falling on its face.
Is that different from Obamacare?
With Obamacare we have this problem that if it doesn’t all come together in a very short period of time the whole thing can kind of crumble. People who need insurance may not be able to sign up. The wrong people may sign up and that will make the risk pools unsustainable. They could extend all sorts of deadlines and that would create other problems. So, in many ways, this is a heavier lift because you’re building something with many moving parts and if one or several of them don’t go as planned the whole thing could come unraveled.
Obviously people disagree about whether that’s a real possibility or not given how many people have a vested interest in keeping it going at this point, but it’s a real balancing act in a way that I’m not sure the income tax was, certainly not in 1913 but probably not in 1862 either.
Can you draw lessons from 1913 and 1862 that should inform Obamacare and other large new government programs?
This is where the historical comparisons are going to start to break down a bit. It strikes me that a lot of the current problem we have, especially with the website, are modern problems, problems of systems integration. There may have been corollary problems, problems in 1862 that sort of look like the data collection problems now. But they’re not on the same level because the world was so different in 1862 than it is now.
I’m tempted to say there’s no substitute for unity of purpose. But the better comparison for Obamacare might be social security which was not enacted during a war and you had plenty of the public in opposition and it required an enormous new bureaucracy to collect information and pay out benefits. And that ultimately worked. But then there are plenty of people who’d say that social security was different because it was a universal benefit whereas Obamacare is not something that will affect most people over the short run, at least not directly.
So I don’t have an easy answer. I should, because that’s a great question for contemporary politics. I’ll think about it.