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Funding employer-based insurance: regressive taxation and premium exclusions

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In the US, health insurance is linked to employment. The tax code treats health insurance premiums preferentially for employers, but not individuals. We show that this regressive policy reduces talent mis-allocation in two ways: (i) The larger tax benefit to those with higher health risk and managerial talent, conditional on being entrepreneurs, alters the incentive to be an entrepreneur. (ii) This enlarges the tax base, which reduces the effective tax rate, and increases wage and capital income. Our general equilibrium model with heterogeneous agents shows that the subsidy can increase welfare, with a maximum gain of 0.46% in consumption equivalent variation.

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Correspondence to Anne Villamil.

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We thank Tiago Cavalcanti, David Chivers, David Enocksson, Soojin Kim, Matthew C. Weinzierl and Constantine Yannelis for helpful discussions, and seminar participants at 2017 Econometric Society Summer Meeting, Midwest Macro Meeting at Purdue, Mini-Conference on Quantitative Macro and Public Finance at University of Illinois, Federal Reserve Bank at Atlanta, Ohio University, SAET-Faro, SED Edinburgh Meeting, SHUFE, SWET Paris1, University of Iowa, University of Miami, University of Zurich, University of Oslo, SUNY Stony Brook, University of Nebraska-Omaha, University of Wisconsin at Whitewater, Wuhan University, Xiamen Univesity, and Zhongnan University of Economics and Law. We would also like to thank the Editor and the two anonymous referees for their thoughtful comments.

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Feng, Z., Villamil, A. Funding employer-based insurance: regressive taxation and premium exclusions. Econ Theory 73, 509–540 (2022).

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