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Cross-Subsidization in Employer-Based Health Insurance and the Effects of Tax Subsidy Reform

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  • Svetlana Pashchenko
  • Ponpoje Porapakkarm

Abstract

Every individual buying employer-based health insurance receives a tax subsidy because premiums are excluded from taxable income. Since these premiums are independent of individual risk, high-risk individuals also receive implicit crosssubsidies from low-risk individuals. In this paper, we explore ways to reform the tax subsidy by taking this implicit cross-subsidization into account. Using a general equilibrium model, we find that targeting the tax subsidy can result in substantial savings. Specifically, the same level of risk-sharing can be achieved at one-third of current costs if the tax subsidy is targeted only toward low-risk individuals and premiums are age-adjusted.

Suggested Citation

  • Svetlana Pashchenko & Ponpoje Porapakkarm, 2016. "Cross-Subsidization in Employer-Based Health Insurance and the Effects of Tax Subsidy Reform," National Tax Journal, National Tax Association;National Tax Journal, vol. 69(3), pages 583-612, September.
  • Handle: RePEc:ntj:journl:v:69:y:2016:i:3:p:583-612
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    References listed on IDEAS

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    Cited by:

    1. Svetlana Pashchenko & Ponpoje (Poe) Porapakkarm & Mariacristina De Nardi, 2017. "The Lifetime Costs of Bad Health," 2017 Meeting Papers 533, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I10 - Health, Education, and Welfare - - Health - - - General

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