A Defense of the Current US Tax Treatment of Employer-Provided Medical Insurance

Abstract

We develop a general equilibrium search model with endogenous health accumulation and a unique feature of the US tax code, that exempts employer-provided medical benefits from taxation, to jointly account for US long term unemployment rate and medical expenditure to aggregate consumption ratio. Through various counterfactual experiments, we find (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 unemployment rate, while reducing income and welfare.