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Tax Incentives and the Demand for Private Health Insurance

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Abstract

This paper studies the effect of an individual insurance mandate (Medicare Levy Surcharge) on the demand for private health insurance (PHI) in Australia. It uses the administrative income tax returns data to show that mandate has several distinct effects on taxpayers' behavior. First, despite the large size of the tax penalty for not having PHI cover relative to the cost of the cheapest eligible insurance policy, the compliance with mandate is relatively low: the proportion of population with PHI cover increases by 6.5 percentage points (15.6%) at the income threshold at which the tax penalty starts to apply. This effect is most pronounced for young age taxpayers, while the middle aged people seem to be least responsive to this specific tax incentive. Second, the discontinuous increase in the average tax rate at the income threshold created by the policy generates a strong incentive for tax avoidance which manifests itself through bunching in the taxable income distribution below the threshold. Finally, after imposing some plausible assumptions the effect of the policy is extrapolated to other income levels to show that overall this policy hasn't had a significant impact on the demand for private health insurance in Australia.

Suggested Citation

  • Olena Stavrunova & Oleg Yerokhin, 2013. "Tax Incentives and the Demand for Private Health Insurance," Working Paper Series 16, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:ecowps:16
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    File URL: http://www.uts.edu.au/sites/default/files/edg_wp16.pdf
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    References listed on IDEAS

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    Cited by:

    1. Bíró, Anikó & Hellowell, Mark, 2016. "Public–private sector interactions and the demand for supplementary health insurance in the United Kingdom," Health Policy, Elsevier, vol. 120(7), pages 840-847.
    2. Gilbert Mbara & Joanna Tyrowicz & Ryszard Kokoszczynski, 2017. "Striking a balance: optimal tax policy with labor market duality," Working Papers 2017-12, Faculty of Economic Sciences, University of Warsaw.
    3. Gong, Xiaodong & Gao, Jiti, 2015. "Nonparametric Kernel Estimation of the Impact of Tax Policy on the Demand for Private Health Insurance in Australia," IZA Discussion Papers 9265, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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