Writing in yesterday's Wall Street Journal (in an editorial titled "Brilliant Deduction"), John Cogan, R. Glenn Hubbard, and Daniel Kessler wax enthusiastic about a proposal to make all medical-care expenditures tax-deductible.
We propose... For anyone with at least catastrophic insurance coverage, all health-care expenses -- employee contributions to employer provided insurance, individually purchased insurance, and out-of-pocket expenses -- would be tax-deductible. The deduction would be available to those who claim the standard deduction and to those itemize.
The most important effect of tax deductibility would be to reduce unproductive health spending. Under current law, medical care purchased through an employers insurance plan is tax-free, while direct medical care purchased by patients must be made with after-tax income. As we and many others have observed, this tax preference has given patients the incentive to purchase care through low-deductible, low co-payment insurance instead of out-of-pocket, which in turn leads to cost unconsciousness and wasteful medical practices...
According to our calculations, based on research from the RAND Health Insurance Experiment and others, we estimate that tax deductibility would reduce spending by approximately $40 billion in 2004 dollars, or 6% of total private health spending.
But can we afford a revenue-loser like this at a time when federal deficits are a major concern? The authors argue that to do otherwise would be penny-wise and pound-foolish.
... full deductibility would lead to approximately $5 less spending on relatively unproductive care for each dollar of foregone tax revenue. That's right -- a progressive tax cut would lead to an efficiency gain in the larger economy about five times as great.
Andrew Samwick, commenting on an earlier post by Brad DeLong, weighs in as well.