Question

One of the key issues in the debate over health care reform is the tax treatment of employee health benefits. Traditionally, such employer paid insurance premiums have not been counted as part of an employee’s taxable income. In addition, since the IRS treats the premiums as a business expense, they work to reduce the firm’s corporate tax liability. Opponents of the status quo argue that if employees had to pay income taxes on the value of the benefits, and if firms could not automatically deduct the cost of the benefits from their taxable income, both employees and employers might shop more carefully for health coverage. If employers and employees pay greater attention to the cost of different plans, providers of both health insurance and health services would face grater incentives to keep costs down. •How would the hedonic wage model of employee benefits change if employees had to pay taxes on health care benefits? •How would the model change if employers could count only part of their health care expenses as a business expense? •How would the changes above affect the optimal combination of wages and employee benefits?

Answer 1