Tuesday, December 07, 2004

More on the Tax Treatment of Health Insurance

In a comment on my earlier post, Adam O'Neill points me to another article by Jon Gruber, this time co-authored with Michael Lettau,** that is relevant to my argument that a more rationale tax treatment of health insurance would replace the current exclusion* of health insurance premiums from income by refundable, progressive tax credits.

Quoting from the article (p. 1275):

[O]ur results imply that complete removal of the tax subsidy to health insurance spending would lead to about 15 million fewer workers being offered health insurance, and a total reduction in insurance spending on the order of 45 percent.
Note that this is a only half of the policy change that I discussed. Specifically, it does not incorporate the use of the new revenue to provide low-income workers with a refundable tax credit if and only if they spend it on health insurance. I conjecture that doing so would undo the reduction in the number of workers offered the insurance. Although I cannot speculate as to the magnitude of this offset, the Gruber-Lettau article also reports (p. 1286) that the probability that a firm offers health insurance is lowest when low-income workers are prevalent at the firm. This result obtains controlling for the tax subsidy to offering health insurance. By providing "use-it-or-lose-it" resources directly to the lowest earning groups, we increase the likelihood that they will join with higher earning workers to demand that the firm shift some compensation into group health insurance, even if the marginal tax incentive is gone.

*A comment on Brad DeLong's blog corrects my terminology--premiums are excluded from income. They are not a deduction, in the sense of an itemized deduction, from taxable income.

** My apologies to Michael--in the original post, I confused him with Martin Lettau.

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Anonymous said...

The Dec. 8, 2004 Wall Street Journal contains an op-ed piece on p. A-12 by John Cogan, Glenn Hubbard, and Daniel Kessler, which advocates tax deductibility of all health-care expenses for anybody who has at least catastrophic insurance coverage. In their proposal, tax deductibility would extend to itemizers and non-itemizers. Along with other claims about the merits of this policy, the authors imply that because poor households have high levels of out-of-pocket expenditures, expanded deductibility would be a pr0gressive change in the tax code. What do you think?

Ken Houghton said...

So Kessler et al. are proposing a "reverse Kerry"--workers have to buy a catastrophic policy to get deductibility?

Oh, wait: "For anyone with at least catastrophic insurance coverage, all health care expenses...would be tax deductible."

In such a system, my incentive is to buy only catastrophic insurance fund an FSA and/or HSA to the extent possible, and know that, so long as I cover expenses to that point, the cost is after-tax. (My employer sees the same.)

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Anonymous said...

The problem with tax refunds for low income groups is that they're not paying taxes anyway. They're getting tax money back. Bush made the same mistake recently. In theory it's a great idea, until you look at the tax returns you're talking about. Health insurance is probably too complex of a topic for him to really understand, though. And everybody knows he has no experience with lower-income situations.