The Economics Seminar series presents Dr. Zhigang Feng discussing “Funding Employer-based Insurance: Regressive Taxation and Premium Exclusions” on April 7 at 3 p.m. in Bentley Annex 302.
Dr. Zhigang Feng
Feng is Assistant Professor of Economics and Business Administration at the University of Nebraska at Omaha.
Abstract: In the United States, employer-based health insurance premiums are not subject to income or payroll taxes. We show that this regressive policy can help correct misallocation between self-employment and firm employment. Linking employment and health insurance creates a wedge between the marginal cost and benefit of employer-based health insurance and employment at a firm. Agents face idiosyncratic health risk, have heterogeneous ability as workers or entrepreneurs, and choose their occupation. Some highly skilled individuals with adverse health shocks leave entrepreneurship while individuals with intermediate ability but favorable health shocks opt to manage firms. When information is imperfect and perfectly discriminating taxes are not available, a regressive tax that subsidizes employer-based health insurance helps correct distortions associated with non-contractible heterogeneity in managerial talent and health shocks. Removing the tax exclusion would raise insurance premiums by 67 percent due to adverse selection, the employer-based health insurance market would partially collapse with 26.9 percent insured, and welfare would decrease -1.9 welfare due to reduced risk sharing and misallocation. If the tax exclusion were extended to private insurance, insurance coverage would increase to 97.2 percent, income taxes increase, and welfare increases by 0.3 percent because the tax falls largely on higher income entrepreneurs.
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