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Tax incentives and the demand for private health insurance

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  • Stavrunova, Olena
  • Yerokhin, Oleg

Abstract

We analyze the effect of an individual insurance mandate (Medicare Levy Surcharge) on the demand for private health insurance (PHI) in Australia. With administrative income tax return data, we show that the mandate has several distinct effects on taxpayers’ behavior. First, despite the large tax penalty for not having PHI coverage relative to the cost of the cheapest eligible insurance policy, compliance with mandate is relatively low: the proportion of the population with PHI coverage increases by 6.5 percentage points (15.6%) at the income threshold where the tax penalty starts to apply. This effect is most pronounced for young taxpayers, while the middle aged seem to be least responsive to this specific tax incentive. Second, the discontinuous increase in the average tax rate at the income threshold created by the policy generates a strong incentive for tax avoidance which manifests itself through bunching in the taxable income distribution below the threshold. Finally, after imposing some plausible assumptions, we extrapolate the effect of the policy to other income levels and show that this policy has not had a significant impact on the overall demand for private health insurance in Australia.

Suggested Citation

  • Stavrunova, Olena & Yerokhin, Oleg, 2014. "Tax incentives and the demand for private health insurance," Journal of Health Economics, Elsevier, vol. 34(C), pages 121-130.
  • Handle: RePEc:eee:jhecon:v:34:y:2014:i:c:p:121-130
    DOI: 10.1016/j.jhealeco.2014.01.001
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    References listed on IDEAS

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    Cited by:

    1. Gilbert Mbara & Ryszard Kokoszczynski & Joanna Tyrowicz, 2017. "Striking a balance: optimal tax policy with labor market duality," GRAPE Working Papers 16, GRAPE Group for Research in Applied Economics.
    2. Bíró, Anikó & Hellowell, Mark, 2016. "Public–private sector interactions and the demand for supplementary health insurance in the United Kingdom," Health Policy, Elsevier, vol. 120(7), pages 840-847.
    3. Gong, Xiaodong & Gao, Jiti, 2015. "Nonparametric Kernel Estimation of the Impact of Tax Policy on the Demand for Private Health Insurance in Australia," IZA Discussion Papers 9265, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Private health insurance; Insurance mandate; Tax incentives; Australia; Tax bunching;

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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