The Distortionary Effects of the Health Insurance Tax Exclusion

The tax exclusion of health insurance premiums represents the largest source of tax expenditures in the United States while reducing the after-tax price of insurance for the majority of households. This paper provides theoretical and empirical evidence about the tax subsidy's effects on a host of outcomes, including coverage generosity, the cost-sharing schedule, the distribution of medical care expenditures, mean medical care expenditures, and average insurer payments. I identify the effects of the tax subsidy solely exploiting legislative tax schedule changes and the differential effects they have on households. I find large effects on all dimensions, including coverage generosity at low levels of annual expenditures as well as overall medical care expenditures and insurer payments. The results imply the tax subsidy annually leads to deadweight loss of over $13 billion.