Large Health Savings Accounts: A Step Toward Tax Neutrality for Health Care

Abstract:     
The creation of tax-free health savings accounts presents a new opportunity to reduce the distortions created by federal tax preferences for health-related expenditures, and ultimately help eliminate those distortions. This paper proposes changes to current law that would allow most workers to receive the full amount that they and their employer spend on their health benefits as a tax-free cash contribution into the worker's health savings account. Restructuring the exclusion for employer-sponsored health benefits in this way would enable more individuals to obtain health insurance that matches their preferences, increase efficiency in the health care sector, and possibly reduce inequities created by the exclusion. These changes also offer a means of limiting the currently unlimited tax exclusion for employer-sponsored health benefits that may be more politically feasible than past proposals.

Number of Pages in PDF File: 32

Keywords: health care, health benefits, health savings accounts, pooling, adverse selection, tax reform, equity, employer-sponsored insurance

JEL Classification: I1, I10, I11, I00, H21, H30, H31, H32,

working papers series