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U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?

  • Jeske, Karsten
  • Kitao, Sagiri

The U.S. tax policy on health insurance is regressive because it subsidizes only those offered group insurance through their employers, who also tend to have a relatively high income. Moreover, the subsidy takes the form of deductions from the progressive income tax system giving high income earners a larger subsidy. To understand the effect of the policy, we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance. A complete removal of the subsidy may lead to a partial collapse of the group insurance market, reduce the insurance coverage and deteriorate welfare. There is, however, room for improving the coverage and welfare by extending a refundable credit to the individual insurance market.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 2 (March)
Pages: 210-221

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Handle: RePEc:eee:moneco:v:56:y:2009:i:2:p:210-221
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