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Redistributing to the sick: How should health expenditures be integrated into the tax system?

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Abstract

I study the optimal joint taxation of income and health expenditures in a model in which individuals face idiosyncratic prices for leisure and health. First-best redistribution based on potential wage rates and health status is not feasible. Within a class of quasi-linear schedules, the conditions for an optimal tax/subsidy system depend on the own and cross price compensated elasticities of demand for leisure and health in a way that generalizes the standard results from the optimal linear income tax literature. Numerical simulations are employed to illustrate the sensitivity of tax and subsidy rates to the correlation between health status and wages. In these simulations, the effective marginal income tax rate optimally increases with health expenditures. However, the welfare gain from optimally incorporating health expenditures into the tax system appears to be very limited, compared with the effect of properly designing the income tax itself.

Suggested Citation

  • Billy Jack, 2003. "Redistributing to the sick: How should health expenditures be integrated into the tax system?," Working Papers gueconwpa~03-03-16, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~03-03-16
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    References listed on IDEAS

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    1. Angus Deaton, 2003. "Health, Inequality, and Economic Development," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 113-158, March.
    2. Helmuth Cremer & Pierre Pestieau, 1996. "Redistributive taxation and social insurance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(3), pages 281-295, July.
    3. BOADWAY, Robin & LEITE-MONTEIRO, Manuel & MARCHAND, Maurice & PESTIEAU, Pierre, 2001. "Social insurance and redistribution," CORE Discussion Papers 2001041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    7. Gahvari, Firouz, 1994. "In-kind transfers, cash grants and labor supply," Journal of Public Economics, Elsevier, vol. 55(3), pages 495-504, November.
    8. Anne Case, 2001. "Health, Income and Economic Development," Working Papers 271, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
    9. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-280, Part I, M.
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    11. Stiglitz, Joseph E & Boskin, Michael J, 1977. "Some Lessons from the New Public Finance," American Economic Review, American Economic Association, vol. 67(1), pages 295-301, February.
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    Cited by:

    1. Giacomo Valletta, 2014. "Health, fairness and taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(1), pages 101-140, June.

    More about this item

    Keywords

    Optimal taxation; health subsidies; redistribution;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I1 - Health, Education, and Welfare - - Health

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