Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-14T15:20:24.025Z Has data issue: false hasContentIssue false
  • English
  • Français

UNEMPLOYMENT AND WELFARE IMPLICATIONS OF THE CURRENT U.S. TAX TREATMENT OF EMPLOYER-PROVIDED MEDICAL INSURANCE

Published online by Cambridge University Press:  04 June 2013

Kevin X. D. Huang  and
Gregory W. Huffman
Kevin X. D. Huang*
Affiliation:
Vanderbilt University
Gregory W. Huffman
Affiliation:
Vanderbilt University
*
Address correspondence to: Kevin X. D. Huang, Department of Economics, Vanderbilt University, VU Station B 351819, 2301 Vanderbilt Place, Nashville, TN 37235, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

The U.S. tax system currently provides an incentive for individuals to obtain medical insurance through their employers. This unique tax treatment is widely excoriated as resulting in high costs and distorting consumption decisions. To study this issue, we develop a general equilibrium search model with endogenous health accumulation and a unique feature of the U.S. tax code, which exempts employer-provided medical benefits from taxation, to jointly account for the U.S. long-term unemployment rate and medical expenditure-to-aggregate consumption ratio. Through various counterfactual experiments, we find that (1) eliminating the employment-based tax subsidy lowers medical expenditure but, via a general equilibrium labor market effect, increases unemployment and lowers output, and contrary to conventional wisdom, lowers welfare; (2) having government raise taxes to finance the provision of medical care substantially increases the unemployment rate, while reducing income and welfare.

Keywords

UnemploymentTaxationMedical Insurance
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 7 , October 2014 , pp. 1547 - 1580
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abowd, John and Zellner, Arnold (1985) Estimating gross labor-force flows. Journal of Business and Economic Statistics 3, 254–283.Google Scholar
Andolfatto, David (1996) Business cycles and labor-market search. American Economic Review 86, 112–132.Google Scholar
Bassanini, Andrea and Marianna, Pascal (2009) Looking inside the Perpetual-Motion Machine: Job and Worker Flows in OECD Countries. Discussion paper 452, Institute for Study of Labor, Bonn.CrossRefGoogle Scholar
Blanchard, Olivier and Diamond, Peter (1990) The cyclical behavior of the gross flows of U.S. workers. Brookings Papers on Economic Activity 2, 85–143.CrossRefGoogle Scholar
Boskin, Michael J. (2011) Get ready for a 70% marginal tax rate. Wall Street Journal, p. A13, July 18.Google Scholar
Burdett, Kenneth and Mortensen, Dale T. (1977) Labor Supply under Uncertainty. Discussion paper 297, Northwestern University, Chicago.Google Scholar
Chen, Kaiji, Imrohoroglu, Ayse, and Imrohoroglu, Selahattin (2009) A quantitative assessment of the decline in the U.S. current account. Journal of Monetary Economics 56, 1135–1147.CrossRefGoogle Scholar
Clark, Kim B. (1990) Unemployment insurance and labor market transitions. In Summers, Lawrence (ed.), Understanding Unemployment. Cambridge, MA: MIT Press.Google Scholar
Congressional Budget Office (2009) The Effects of Two Specified Policy Options to Health Care on the Federal Budget Deficit. Letter to the Honorable Paul Ryan. http://www.cbo.gov/ftpdocs/105xx/doc10563/09-21-RyanLtr.pdf.Google Scholar
Employee Benefit Research Institute (2000) Sources of Health Insurance and Characteristics of the Uninsured. Employee Benefit Research Institute, Washington, DC.Google Scholar
Fang, Hanming and Gavazza, Alessandro (2011) Dynamic inefficiencies in an employment-based health-insurance system: Theory and evidence. American Economic Review 101, 3047–3077.CrossRefGoogle Scholar
Feldstein, Martin and Friedman, Bernard (1977) Tax subsidies, the rational demand for insurance and the health care crisis. Journal of Public Economics 7, 155–178.CrossRefGoogle Scholar
Fonseca, Raquel, Michaud, Pierre-Carl, Galama, Titus, and Kapteyn, Arie (2008) Retirement and the Demand for Health. Working paper, RAND, Santa Monica, CA.Google Scholar
Gould, Elise (2004) The Chronic Problem of Declining Health Coverage: Employer-Provided Health Insurance Falls for a Third. Economic Policy Institute.Google Scholar
Grossman, Michael (1972) On the concept of health capital and the demand for health. Journal of Political Economy 80, 223–255.CrossRefGoogle Scholar
Gruber, Jonathan and Madrian, Brigitte C. (2002) Health Insurance, Labor Supply, and Job Mobility: A Critical Review of the Literature. NBER Working Paper 8817, National Bureau of Economic Research.CrossRefGoogle Scholar
Guler, Bulent, Guvenen, Fatih, and Violante, Giovanni L. (2011) Joint-Search Theory: New Opportunities and New Frictions. Working paper, University of Minnesota, Minneapolis.CrossRefGoogle Scholar
Hall, Robert E. (2005a) Employment efficiency and sticky wages: Evidence from flows in the labor market. Review of Economics and Statistics 87, 397–407.CrossRefGoogle Scholar
Hall, Robert E. (2005b) Job loss, job finding, and unemployment in the U.S. economy over the past fifty years. NBER Macroeconomics Annual 20, 101–137.CrossRefGoogle Scholar
Halliday, Timothy J., He, Hui, and Zhang, Hao (2011) Health Investment over the Life-Cycle. Working paper, University of Hawaii, Manoa.Google Scholar
Jeske, K. and Kitao, S. (2009) U.S. tax policy and health insurance demand: Can a regressive policy improve welfare? Journal of Monetary Economics 56, 210–221.CrossRefGoogle Scholar
Jung, Juergen and Tran, Chung (2011) Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010. Working paper, Towson University, Towson, MD.CrossRefGoogle Scholar
Layard, Richard, Nickell, Stephen, and Jackman, Richard (1991) Unemployment: Macroeconomic Performance and the Labour Market. Oxford, UK: Oxford University Press.Google Scholar
Lucas, Robert E. Jr., (1987) Models of Business Cycles. Oxford, UK: Basil Blackwell.Google Scholar
Lucas, Robert E. Jr., and Prescott, Edward C. (1974) Equilibrium search and unemployment. Journal of Economic Theory 7, 188–209.CrossRefGoogle Scholar
Mankart, Jochen and Oikonomou, Rigas (2011) Household Search and the Aggregate Labor Market. Job market paper, London School of Economics, London.Google Scholar
McGrattan, Ellen R. and Prescott, Edward C. (2000) Is the stock market overvalued? Federal Reserve Bank of Minneapolis Quarterly Review, 20–40.CrossRefGoogle Scholar
Merz, Monika (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36, 269–300.CrossRefGoogle Scholar
Mortensen, Dale T. (1990) Search Equilibrium and Real Business Cycles. Working paper, Northwestern University.Google Scholar
Pries, Michael and Rogerson, Richard (2005) Hiring policies, labor market institutions, and labor market flows. Journal of Political Economy 113, 811–839.CrossRefGoogle Scholar
Scholz, John Karl and Seshadri, Ananth (2010) Health and Wealth in a Life-Cycle Model. Working paper 2010-224, University of Michigan, Ann Arbor.CrossRefGoogle Scholar
Shimer, Robert (2007) Reassessing the Ins and Outs of Unemployment. NBER working paper 13421, National Bureau of Economic Research.CrossRefGoogle Scholar
Wang, Cheng and Williamson, Stephen (1996) Unemployment insurance with moral hazard in a dynamic economy. Carnegie–Rochester Conference Series on Public Policy 44, 1–41.CrossRefGoogle Scholar
Yogo, Motohiro (2009) Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets. NBER working paper 15307, National Bureau of Economic Research.CrossRefGoogle Scholar
Zhao, Kai (2010) Social Security and the Rise in Health Spending: A Macroeconomic Analysis. Working paper, University of Western Ontario.Google Scholar