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Tax Subsidies to Employer-Provided Health Insurance

  • Jonathan Gruber
  • James Poterba

This paper investigates the current tax subsidy to employer- provided health insurance, and presents new evidence on the economic effects of various tax reforms. It argues that previous analyses have overstated the tax subsidy to employer-provided insurance by neglecting the substantial and growing importance of after-tax employee payments for employer-provided insurance, as well as the tax subsidy for extreme medical expenses, which discourages insurance purchase. Even after considering these factors, however, the net tax subsidy to employer-provided insurance is substantial, with tax factors generating an average reduction of approximately thirty percent in the price of this insurance. Reducing the tax subsidy, either by capping the value of employer-provided health insurance that could be excluded from taxation, or eliminating the exclusion entirely, would have substantial effects on the level of employer- provided insurance and on tax revenues.

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File URL: http://www.nber.org/papers/w5147.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5147.

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Date of creation: Jun 1995
Date of revision:
Publication status: published as Empirical Foundation of Household Taxation, Martin Felstein and James Poterba, editors, (Chicago: University of Chicago Press, 1996), pp. 135-164.
Handle: RePEc:nbr:nberwo:5147
Note: AG HC PE
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  1. Stephen A. Woodbury & Daniel S. Hamermesh, . "Taxes, Fringe Benefits, and Faculty," Upjohn Working Papers and Journal Articles saw1992, W.E. Upjohn Institute for Employment Research.
  2. Burman, Leonard E. & Williams, Roberton, 1994. "Tax Caps on Employment-Based Health Insurance," National Tax Journal, National Tax Association, vol. 47(3), pages 529-45, September.
  3. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
  4. Louis Kaplow, 1991. "The Income Tax as Insurance: The Casualty Loss and Medical Expense Deductions and the Exclusion of the Medical Insurance Premiums," NBER Working Papers 3723, National Bureau of Economic Research, Inc.
  5. Feldstein, Martin & Samwick, Andrew A., 1992. "Social Security Rules and Marginal Tax Rates," National Tax Journal, National Tax Association, vol. 45(1), pages 1-22, March.
  6. Woodbury, Stephen A, 1983. "Substitution between Wage and Nonwage Benefits," American Economic Review, American Economic Association, vol. 73(1), pages 166-82, March.
  7. Holmer, Martin, 1984. "Tax policy and the demand for health insurance," Journal of Health Economics, Elsevier, vol. 3(3), pages 203-221, December.
  8. Jonathan Gruber & Alan Krueger, 1990. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensations Insurance," Working Papers 659, Princeton University, Department of Economics, Industrial Relations Section..
  9. Long, James E & Scott, Frank A, 1982. "The Income Tax and Nonwage Compensation," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 211-19, May.
  10. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  11. Marquis, M Susan & Phelps, Charles E, 1987. "Price Elasticity and Adverse Selection in the Demand for Supplementary Health Insurance," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 299-313, April.
  12. Kaplow, Louis, 1992. "Income Tax Deductions for Losses as Insurance," American Economic Review, American Economic Association, vol. 82(4), pages 1013-17, September.
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