Health Insurance and Tax Policy

Karsten Jeske and Sagiri Kitao
Working Paper 2005-14
August 2005

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The U.S. tax policy on health insurance favors only those offered a group insurance through their employers. This policy is highly regressive since the subsidy takes the form of deductions from the progressive tax system. The paper investigates alternatives to the current policy. We find that the complete removal of the subsidy results in a significant reduction in the insurance coverage and serious welfare deterioration. However, eliminating regressiveness in the group insurance subsidy and extending benefits to the private insurance market improve welfare and raise the coverage. Our work is the first in highlighting the importance of studying health policy in a general equilibrium framework with an endogenous demand for the health insurance. We use the Medical Expenditure Panel Survey (MEPS) to calibrate the process for income, health expenditure shocks, and health insurance offer status and succeed in producing the pattern of insurance demand as observed in the data, which serve as a solid benchmark for the policy experiments.

JEL classification: E21, E62, I10

Key words: health insurance, risk sharing, tax policy

The authors thank Tom Sargent, Gianluca Violante, and seminar participants at the Atlanta Fed, New York University, and the European Central Bank for helpful comments. The authors also thank Katie Hsieh for her excellent research assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Karsten Jeske, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia, 30309-4470, 404-498-8825, 404-498-8956 (fax),, or Sagiri Kitao, Department of Economics, New York University, 269 Mercer Street, Room 823, New York, New York 10003, 212-992-9773,