The welfare gain from replacing the health insurance tax exclusion with lump-sum tax credits

  • Liqun Liu
  • Andrew J. Rettenmaier
  • Thomas R. Saving


This paper analyzes the welfare gain from replacing the tax exclusion of employer-provided health insurance with a lump-sum tax credit. It differs from earlier studies in that we look at the welfare cost of health insurance tax exclusion as coming directly from excessive health insurance rather than from overconsumption of medical care and that we account for the labor market effect of the tax exclusion on welfare. Both differences work to produce a smaller tax reform welfare gain. For a set of mid-range parameter values, the welfare gain is about 21% of current health insurance tax expenditures. In addition, government tax expenditures would fall by 38%, and health insurance spending would fall by 77% after the reform.


Health insurance Tax exclusion Subsidy Welfare cost 

JEL Classification

H24 I18 


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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Liqun Liu
    • 1
  • Andrew J. Rettenmaier
    • 1
  • Thomas R. Saving
    • 2
  1. 1.Private Enterprise Research CenterTexas A&M UniversityCollege StationUSA
  2. 2.Private Enterprise Research Center and Department of EconomicsTexas A&M UniversityCollege StationUSA

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