The Income Tax as Insurance: The Casualty Loss and Medical Expense Deductions and the Exclusion of the Medical Insurance Premiums

42 Pages Posted: 13 Sep 2010

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Date Written: May 1991

Abstract

Whether personal income tax deductions are appropriate refinements to the concept of income or unwarranted tax expenditures continues to be the subject of debate. The casualty loss and medical expense deductions are frequently justified on the ground that ability to pay is reduced by largely unavoidable expenditures or losses. This article reconsiders the question taking account of the availability of private insurance, which is in fact widespread for relevant losses in both areas. When individuals can insure, the second level of insurance implicit in the casualty loss and medical expense deductions distorts consumption choices and insurance decisions. In particular, individuals may be more exposed to losses because of tax deductions commonly believed to mitigate them. Given the option, individuals would prefer a regime that eliminated the deductions and offered correspondingly lower tax rates.

Suggested Citation

Kaplow, Louis, The Income Tax as Insurance: The Casualty Loss and Medical Expense Deductions and the Exclusion of the Medical Insurance Premiums (May 1991). NBER Working Paper No. w3723. Available at SSRN: https://ssrn.com/abstract=1674287

Louis Kaplow (Contact Author)

Harvard Law School ( email )

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