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A Defense of the Current US Tax Treatment of Employer-Provided Medical Insurance

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Author Info

  • Kevin X. D. Huang

    ()
    (Department of Economics, Vanderbilt University)

  • Gregory W. Huffman

    ()
    (Department of Economics, Vanderbilt University)

Abstract

The US tax system currently provides an incentive for individuals to obtain medical insurance through their employers. This feature introduces a distortion which encourages households consume more medical services than they otherwise would, and likely results in the medical consumption taking up 17 percent total consumption, which is much higher than in other advanced economies. This unusual and unique tax treatment is widely excoriated as resulting in high costs and distorting consumption decisions. This paper presents a simple general equilibrium model to compare the outcomes for different systems for the provision of medical services. It is shown that the current tax system may be superior to an identical system in which the tax subsidy is absent. It also is shown that eliminating the tax subsidy for employer-provided medical insurance results in higher unemployment, lower output, and lower welfare. Furthermore, having the government raise taxes to finance the provision of medical care results in substantial decreases in employment, output and welfare.

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File URL: http://www.accessecon.com/pubs/VUECON/vu10-w01R.pdf
File Function: Revised version, October 2011
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1001.

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Date of creation: Feb 2010
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Handle: RePEc:van:wpaper:1001

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Tax; employment; medical benefit; welfare;

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References

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  1. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  2. Wang, C. & Williamson, S., 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," GSIA Working Papers 1995-13, Carnegie Mellon University, Tepper School of Business.
  3. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  4. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets," NBER Working Papers 15307, National Bureau of Economic Research, Inc.
  5. Bassanini, Andrea & Marianna, Pascal, 2009. "Looking Inside the Perpetual-Motion Machine: Job and Worker Flows in OECD Countries," IZA Discussion Papers 4452, Institute for the Study of Labor (IZA).
  6. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-83, June.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Employer-provided health insurance is not that bad
    by Economic Logician in Economic Logic on 2010-12-22 15:57:00
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Cited by:
  1. Shantanu Bagchi & James Feigenbaum, 2014. "Is Smoking a Fiscal Good?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 170-190, January.

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  1. Economic Logic blog

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