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Tax Credits and the Use of Medical Care

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  • Michael Smart
  • Mark Stabile

Abstract

Several recent proposals have advocated using the income tax system to collect user fees to help fund the health care system. While there is a considerable amount of research investigating both how individuals respond to tax incentives for employer provided health insurance and on the effects of user fees payable at the point of service on the use of health care services, there is limited evidence on how individuals respond to tax incentives when these are not realized until taxes are paid. This paper uses existing exemptions in the Canadian tax code that allow individuals to deduct the cost of health care or health insurance from their taxable income in order to identify the tax price elasticity of demand for health care when price changes are realized at the end of the tax year. Our results suggest that despite not realizing the tax benefit at the time of purchase, individuals are quite responsive to changes in the tax price of health care. Our elasticity estimates for a wide range of health care products are well within the range of traditional price elasticity estimates, including in particular our estimates for prescription drugs. We also find some evidence that suggests individuals trade off risk sharing through traditional insurance companies with risk sharing through the tax code. That is, as the tax price of health care decreases, individuals spend more on health care, but spend less on health insurance.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9855.

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Date of creation: Jul 2003
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Publication status: published as Smart, Michael and Mark Stabile. "Tax Credits, Insurance, And The Use Of Medical Care," Canadian Journal of Economics, 2005, v38(2,May), 345-365.
Handle: RePEc:nbr:nberwo:9855

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  1. David M. Cutler, 2003. "Employee Costs and the Decline in Health Insurance Coverage," NBER Chapters, in: Frontiers in Health Policy Research, Volume 6, pages 27-54 National Bureau of Economic Research, Inc.
  2. Bridget Terry Long, 2003. "The Impact of Federal Tax Credits for Higher Education Expenses," NBER Working Papers 9553, National Bureau of Economic Research, Inc.
  3. Mark Stabile, 2001. "Private insurance subsidies and public health care markets: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 34(4), pages 921-942, November.
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