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THE EFFECT OF TAX PREFERENCES ON HEALTH SPENDING
John F Cogan1, R Glenn Hubbard, Daniel P Kessler
1Hoover Institution, Stanford University, Stanford, CA, USA.
National Tax Journal
|April 14, 2012
Summary
The tax preference for health insurance significantly impacts healthcare spending. This study uses Social Security tax thresholds to identify the effect of this tax benefit on insurance costs.
Area of Science:
- Health Economics
- Public Finance
- Econometrics
Background:
- Tax preferences for employer-sponsored health insurance are a significant feature of the U.S. tax system.
- Previous research has explored the effects of tax preferences on health insurance markets, but identifying causal impacts remains challenging.
- Understanding these effects is crucial for designing effective health and tax policies.
Purpose of the Study:
- To estimate the causal effect of the tax preference for health insurance on healthcare spending.
- To leverage the Social Security tax threshold as a natural experiment to identify this effect.
- To provide empirical evidence on the magnitude of the tax preference's impact.
Main Methods:
- Utilizing data from the Medical Expenditure Panel Surveys (1996-2005).
- Employing an identification strategy based on the statutory threshold for Social Security taxes.
- Comparing healthcare spending for workers just below and just above the Social Security tax threshold.
Main Results:
- A significant positive effect of the tax preference for health insurance on healthcare spending was found.
- The results are consistent with the hypothesis that tax benefits increase the utilization of health insurance and subsequent spending.
- The magnitude of the effect aligns with estimates from related economic literature.
Conclusions:
- The tax preference for health insurance demonstrably influences healthcare spending.
- Policy interventions related to health insurance taxation can have substantial impacts on overall healthcare expenditures.
- Further research can explore the distributional consequences and optimal design of such tax preferences.
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