Is There a Right Way to Promote Health Insurance Through the Tax System?

The exclusion of employer contributions to health premiums has skewed the development of the insurance market, resulting in generous coverage for higher-income workers but leaving millions of others uninsured and facing rapidly rising health costs. The paper considers four recent reform proposals: capping the exclusion, tax credits for insurance, tax incentives for high-deductible insurance and health savings accounts, and full tax deductibility of out-of-pocket spending. Such proposals could promote greater efficiency and equity in the health market, but insurance market reforms are also needed to minimize potential disruption to employer risk pools.