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A Defense of the Current US Tax Treatment of Employer-Provided Medical Insurance

  • Kevin X. D. Huang

    ()

    (Department of Economics, Vanderbilt University)

  • Gregory W. Huffman

    ()

    (Department of Economics, Vanderbilt University)

The US tax system currently provides an incentive for individuals to obtain medical insurance through their employers. This feature introduces a distortion which encourages households consume more medical services than they otherwise would, and likely results in the medical consumption taking up 17 percent total consumption, which is much higher than in other advanced economies. This unusual and unique tax treatment is widely excoriated as resulting in high costs and distorting consumption decisions. This paper presents a simple general equilibrium model to compare the outcomes for different systems for the provision of medical services. It is shown that the current tax system may be superior to an identical system in which the tax subsidy is absent. It also is shown that eliminating the tax subsidy for employer-provided medical insurance results in higher unemployment, lower output, and lower welfare. Furthermore, having the government raise taxes to finance the provision of medical care results in substantial decreases in employment, output and welfare.

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File URL: http://www.accessecon.com/pubs/VUECON/vu10-w01R.pdf
File Function: Revised version, October 2011
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1001.

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Date of creation: Feb 2010
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Handle: RePEc:van:wpaper:1001
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  1. Wang, Cheng & Williamson, Steve, 1996. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Staff General Research Papers 5088, Iowa State University, Department of Economics.
  2. Andrea Bassanini & Pascal Marianna, 2009. "Looking Inside the Perpetual-Motion Machine: Job and Worker Flows in OECD Countries," OECD Social, Employment and Migration Working Papers 95, OECD Publishing.
  3. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  4. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-83, June.
  5. Motohiro Yogo, 2008. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets," 2008 Meeting Papers 63, Society for Economic Dynamics.
  6. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
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