The Bush Administration’s Health Insurance Tax Reform Proposal

Federal, state, and local governments all offer assistance to poor people. Beyond help to the poor, however, governments also use the tax code, as well as direct expenditures, to encourage or discourage various economic activities. The fundamental question raised in this Outlook is under what circumstances that encouragement or discouragement should be a function of income. Government’s encouragement of the purchase of health insurance is a function of income, but in a perverse way: more encouragement is given to the wealthy than to the poor who are not eligible for public insurance. Why does this arrangement persist?

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