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The Complex Relationship between Taxes and Health Insurance

27 Pages Posted: 5 Jan 2010 Last revised: 20 Sep 2011

Amy Monahan

University of Minnesota - Twin Cities - School of Law

Date Written: January 4, 2010

Abstract

Our current system of tax preferences for the purchase of health insurance and for unreimbursed medical expenses has few fans, particularly among economists. Economists argue that excluding the cost of health insurance from taxable income leads individuals to purchase more health insurance than they would if they were bearing the full cost of such coverage. The resulting “over insurance” leads to individuals consuming more medical care than they would if they had purchased optimal insurance. This over consumption increases health care costs and therefore health insurance premiums. Similarly, preferencing the consumption of medical goods and services over other goods and services through various tax-advantaged vehicles such as flexible spending accounts distorts decision making and leads individuals to consume more medical care than they would in the absence of a subsidy.

After examining these efficiency-based arguments against our current tax treatment of health insurance and unreimbursed medical expenses, this paper argues that focusing solely on efficiency concerns in this context fails to take into account the complex relationship between taxes and health insurance. The final section of the paper examines how the Patient Protection and Affordable Care Act impacts the relationship between taxes and health insurance in terms of both efficiency and broader reform goals.

Keywords: health reform, health insurance

JEL Classification: H21, I18, K32, K34

Suggested Citation

Monahan, Amy, The Complex Relationship between Taxes and Health Insurance (January 4, 2010). Minnesota Legal Studies Research Paper No. 10-01. Available at SSRN: https://ssrn.com/abstract=1531322 or http://dx.doi.org/10.2139/ssrn.1531322

Amy Monahan (Contact Author)

University of Minnesota - Twin Cities - School of Law ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

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