Incentives vs. Controls in Health Policy: Broadening the Debate

By Jack A. Meyer; American Enterprise Institute for Public Policy Research | Go to book overview

4
Reform of the Individual Income Tax: Effects on Tax Preferences for Medical Care

Cynthia Francis Gensheimer

The exclusion of employer-provided medical insurance premiums from employees' taxable incomes might be cut back as part of an effort to introduce more competition into medical care. Employees would then probably purchase less comprehensive health insurance coverage, shoulder more of the cost of their care, and thereby be more cost- conscious consumers. The employer exclusion might be cut back as part of a separate effort to reform the income tax, however, as discussed in this chapter. 1

Under a comprehensive income tax, for example, employees would be taxed on the value of employer-provided health and accident insurance; they would no longer be able to deduct charitable contributions to nonprofit medical institutions or large out-of-pocket medical expenses; and they would be taxed on the interest on what are now tax-exempt hospital bonds. This chapter discusses how these tax preferences fit into the debate concerning reform of the individual income tax and focuses particularly on the largest tax preference for medical care--the exclusion of employer-provided health insurance. 2


Current Law and Historical Background

Under a truly comprehensive income tax, individuals would be taxed on all compensation, whether cash or fringe benefits, and all other income, less the associated expenses of earning the income. 3 Much income is now sheltered from taxation through special tax deductions, exclusions, exemptions, and tax credits--called tax preferences.

From its inception in 1913, the individual income tax has never been truly comprehensive, but distortions caused by tax preferences were initially mild, since until World War II the tax applied to a small

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