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Reforming the Tax Preference for Employer Health Insurance

Author

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  • Joseph Bankman
  • John Cogan
  • R. Glenn Hubbard
  • Daniel P. Kessler
Abstract
The tax preference for employer-sponsored health insurance contributes to the very high level of health spending in the United States. In this paper, we consider the consequences for spending of one approach to reducing this preference: giving people with health insurance an additional deduction for their expected out-of-pocket spending, that is, an additional deduction that declines as the actuarial value of their insurance rises. We show that this approach would reduce health spending more and have a smaller budget cost than the deduction for actual out-of-pocket spending analyzed by Cogan, Hubbard, and Kessler by encouraging a shift to higher-copayment health insurance. We estimate that a deduction for expected out-of-pocket expenses would reduce private health spending by $86 billion in 2010 at a budget cost of approximately $5 billion. We conclude that, under reasonable assumptions about consumers' valuation of this incremental spending and the cost of public funds, such a deduction would be welfare improving.

Suggested Citation

  • Joseph Bankman & John Cogan & R. Glenn Hubbard & Daniel P. Kessler, 2012. "Reforming the Tax Preference for Employer Health Insurance," Tax Policy and the Economy, University of Chicago Press, vol. 26(1), pages 43-58.
    • Handle: RePEc:ucp:tpolec:doi:10.1086/665502
    DOI: 10.1086/665502
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    References listed on IDEAS

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    1. Gruber, Jonathan & Lettau, Michael, 2004. "How elastic is the firm's demand for health insurance?," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1273-1293, July.
    2. Pauly, Mark V., 2009. "Limiting the Tax Exclusion for Employmentbased Health Insurance: Are Improved Equity and Efficiency Enough?," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(3), pages 555-562, September.
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    4. Guyton, John L. & Korobow, Adam K. & Lee, Peter S. & Toder, Eric J., 2005. "The Effects of Tax Software and Paid Preparers on Compliance Costs," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(3), pages 439-448, September.
    5. Feldstein, Martin & Friedman, Bernard, 1977. "Tax subsidies, the rational demand for insurance and the health care crisis," Journal of Public Economics, Elsevier, vol. 7(2), pages 155-178, April.
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