Funding Employer-based Insurance: Regressive Taxation and Premium Exclusions

Transcription

1 Funding Employer-based Insurance: Regressive Taxation and Premium Exclusions Zhigang Feng University of Nebraska Anne Villamil University of Iowa 2017 North American Summer Meeting June 13, 2017

2 EHI and Talent Misallocation EHI: US employment-based health insurance links insurance to job Entrepreneurs: important for growth, innovation & employment Small businesses account for 25% of US employment growth. 1 Empirical studies: EHI & health status affect self-employment Gai and Minniti (2015), Fairlie, Kapur & Gates (2011) Popular press: health insurance inhibits entrepreneurship Ortmans (2010), Shane (2009), Sullivan (2009) Model: EHI entrepreneurial talent misallocation Policy: Progressive taxation can correct the misallocation 1 (< 20 workers) from 1992 to 2005

3 Health Costs: High in US & Employment-based

4 US Employment-based Health Insurance (EHI) Fact 1: US spent more than 18% of income on health. Fact 2: Over 90% of US insured working-age people have EHI. Fact 3: EHI premium is based on a community rating. 2 Fact 4: EHI is correlated with firm size. Offer rates are stable. Fact 5: EHI premium is deductible from employee taxable income. This exclusion reduced federal tax revenue by $268 billion in Taxpayers in high tax brackets benefit more than low (regressive). 2 US employers must offer health plans at common prices to all employees.

5 Intuition: EHI and Talent Misallocation Occupational choice model: heterogeneous shocks managerial talent x health expenditure m. Perfect labor market: risk observable Compensation fully adjusts with shocks x & m Insurance decision is independent of occupational choice MU of being a worker = across agents Imperfect labor market: risk not observable 3 EHI with single price of compensation: cannot adjust with m Insurance decision interacts with occupational choice MU of being a worker across agents Talent Misallocation: High-skilled-unhealthy leave entrepreneurship Medium-skilled-healthy opt for entrepreneurship 3 Limits private risk sharing & requires intervention

6 Example: Simple Endowment Economy HH heterogeneity driven by shocks: x [x, x]: managerial ability m {m, m}: health expenditure shock; m = m with prob. p & uniform dist. p [0, 1] Worker productivity: z units of consumption good Actuarially fair health insurance: employer-based (EHI): pooling price π E private: price π(p) conditional on idiosyncratic type

7 Economy A: no EHI Consider an economy with no health insurance. HH payoffs: worker: p u(z m) + (1 p) u(z m) entrepreneur: p u(x m) + (1 p) u(x m) Equilibrium frontier of occupational choice: HH with x > x A (p) = z chooses to be entrepreneur Otherwise chooses to be a worker

8 Economy B: EHI and Talent Misallocation Introduce EHI to economy A. Workers have access to EHI Entrepreneur can only get private insurance. 4 Assume sufficient RA & independence between x and m π E = ˆp (ˆpm + (1 ˆp) m) d ˆp = 1 2 (m + m) π(p) = pm + (1 p) m HH payoffs: Worker: p u(z π E ) + (1 p) u(z π E ) Entrepreneur: p u(x π(p)) + (1 p) u(x π(p)) 4 Entrepreneurs have limited access to EHI depending on the firm size, due to the cost of organizing EHI & limited risk sharing in small pools (data and model).

9 Economy B: EHI and Talent Misallocation Equilibrium frontier of occupational choice: HH with x > x B (p) = z + [π(p) π E] chooses to be entrepreneur Talent misallocation: compared with Economy A more healthy (π(p) < π E ) but less talented (xb (p) < z) enter entrepreneurship less healthy (π(p) > π E ) but high ability (xb (p) > z) leave entrepreneurship Point: Talent misallocation lead to adverse macro effects

10 Economy B: EHI and Talent Misallocation Economy B Economy A Health (p) Entrepreneurs: Workers: Managerial ability (x)

11 Economy C: Regressive tax and allocation We introduce subsidy to EHI into economy B. worker receives αzπ E ; entrepreneur gets αxπ(p). Equilibrium frontier of occupational choice: household with x > xc (p) = z+[π(p) π E ]+αzπ E [1+απ(p)] otherwise to be a worker. chooses entrepreneur; A regressive subsidy to health insurance corrects talent misallocation: xc (p) x B (p) > 0 for larger p, and x C (p) x B (p) < 0 for smaller p. xc (p) z when α becomes sufficiently large.

12 Summary: Regressive tax and allocation EHI interwines the cross-subsidization between healthy and unhealthy agents, and occupational choice, which leads to talent misallocation. w/ imperfect information, and w/o perfectly discriminating tax treatment, direct corrective intervention 5 to remedy is difficult. A regressive tax (as seen in the current US tax code) partially implements the direct corrective policy. Direct effect: change the net-tax return to entrepreneurship Indirect (trickle down) effect: affect the tax base, the effective tax rate, real wage and interest. 5 Tax healthy unskilled, subsidize unhealthy skilled entrepreneurs.

13 Overview of the Paper Extend endowment example to dynamic setting production technology incomplete market & distortionary taxes Study effect of EHI tax exclusion on occupational choice: entrepreneur or worker welfare Find optimal level of tax subsidy for EHI (minimize welfare loss from talent distortions)

14 The Model: Environment Dynamic GE model: Choose occupation & health insurance discrete time: t=0,1,2,... measure one of infinitely lived individuals Agents choose occupation: entrepreneur or worker Agents can purchase health insurance: insure health expenditure shocks

15 Environment: Endowments, Preferences & Production Endowment heterogeneity: Agents are distinguished by a: assets from previous period x lognormal: talent for managing z AR(1): labor productivity m: health expenditure shock, finite-state Markov process i HI : health insurance status from previous period Preferences: E { t=0 βt U(c t ) }, with U(c) = c1 ρ 1 1 ρ Production technology: Y = x (1 α γ) k α n γ, with (α + γ) < Returns to scale at firm level, Lucas (1978) span-of-control

16 Model Overview

17 Factor Markets Capital: After paying off out-of-pocket health expenditure (oop), agents can invest net assets ã = (a oop) in Intermediary: Earn deposit rate r Own firm: Borrow l from Intermediary if necessary l = k ã. Labor: Compensation package: w = wage w + EHI EHI offer with prob. p E, determined by random shock i E offer EHI: costs [1 + g(n)] q E not offer EHI: costs q E, where = w = w + p E [1 + g(n)] q E + (1 p E )q E Notation p E : prob of EHI increases with firm size, consistent MEPS data g(n): administrative cost decrease in n due to economies of scale q E : ave cost of providing EHI (employer insurance premium cost)

18 Health Insurance Market Two types of insurance: 7 Group insurance (EHI) π E : EHI premium independent of prior health or individual states φ( ) [0, 1]: coinsurance rate ψ [0, 1]: fraction of premium paid by the employer ˆp E : EHI is offered with prob. determined by shock i E Private insurance π P (m): private insurance premium depends on individual states φ( ) [0, 1]: coinsurance rate. 7 We distinguish p E and ˆp E = [ n n dψ(s) p E(n ) ] dψ(s) because workers are randomly matched with firms of different sizes.

19 Mandated Benefit and Distortion Intuition: Marginal opportunity cost of being a worker: w = wage w + EHI Marginal benefit of being a worker: wage + value of EHI. Idiosyncratic health risk + risk aversion = Marginal cost Marginal benefit

20 Government Tax revenue: income tax: T (y) = ( y λ p y 1 τp) consumption tax: τ c payroll tax: τ s Government spending: social safety net: minimum consumption c subsidize the purchase of EHI other government spending: G Progressivity of income tax: measured by τ p Government runs balanced budget period by period

21 Optimal Behavior: Entrepreneur For given managerial ability x, net assets ã = a oop, interest rate r and cost of labor w, the entrepreneur s return is: [ ] Π(x, ã; r, w) = max x (1 α γ) k α n γ wn rk k,n where w = w + p E [1 + g(n)] q E + (1 p E )q E oop: out-of-pocket health expenditure n (x, ã; r, w) and k (x, ã; r, w)

22 Optimal Behavior: Occupational Choice For given aggregate variables Φ = { r, w, T ( ), τ s, π, φ( ) }, agent s = (a, x, z, m, i HI ) is an entrepreneur if s E(Φ), where E(Φ) = { s S : V e + βev(s entr) V w + βev(s wkr) } V e and V w are defined: 8 V e = p E (n )U(c i E = 1) + (1 p E (n ))U(c i E = 0) V w = ˆp E U(c i E = 1) + (1 ˆp E )U(c i E = 0) 8ˆp E reflects the random matching between workers and firms.

23 Household s Problem V(s) = [ max Ie {a,c,i HI,Ie} V e + (1 I e ) V w + βev(s ) ] subject to: (1 + τ c )c + a + oop + π cap inc + lab inc Tax + T SI Notation: Tax = T (cap inc + lab inc ) + τ s [(1 I e ) wz + I e ν(x, ã) (1 I e )i E π] cap inc = {(r δ)a wz + (1 ie ) q E i E π if I e = 0 lab inc = ν(x, ã) i E π if I e = 1 oop = (1 i HI φ(m)) m

24 EHI & Occupational Choice Mandated benefits Perfect financial, labor market Asset, Health Workers: Entrepreneurs: Misallocation of Talents Managerial ability

25 Regressive Tax & Talent Allocation Regressive tax subsidy to health insurance: Direct effect: increases net-tax return to entrepreneurship of highly skilled unhealthy agents decreases net-tax return to entrepreneurship of low skilled healthy improves talent allocation: rotates equilibrium efficient frontier x Indirect ( trickle down ) effect: higher productivity at firms implies higher profit for entrepreneurs and larger income tax base reduces effective tax for workers raises wage and capital income

26 Tax Subsidy to EHI & Talent Allocation: New Channel Tax subsidy to purchase EHI is equivalent to regressive tax Tax = T (inc) + τ s [(1 I e ) wz + I e ν(x, ã) (1 I e )i E π] inc = { (r δ)a + wz + (1 i E ) q E i E π if I e = 0 (r δ)a + ν(k, x; r, w) i E π if I e = 1. Jeske and Kitao (2009): Regressive tax improves welfare since it improves risk sharing (holds EHI pool together) New channel: Regressive tax policy improves the talent distribution

27 Regressive Tax: Policy Experiment Two policy experiments financed by lump-sum transfers Policy I: Abolish subsidy to EHI adverse selection in the EHI market will reduce risk sharing being a worker becomes less attractive for low skilled healthy agents, leads to worse talent allocation Policy II: Extend EHI subsidy to private health insurance subsidized private insurance improves risk sharing identical taxations for EHI and private insurance reduces the wedge between MU and MC of being workers

28 Regressive Tax & Talent Allocation Baseline Perfect financial, labor market Asset, Health More regressive subsidy to EHI Workers Entrepreneurs Managerial ability

29 Talent Allocation Channel Table: Talent Allocation under Policies Statistics Base No subsidy Extend subsidy Ent % ave x Output per firm size size size size size HI take-up (%) EHI premium Welfare % +CEV

30 Original Question & Answer Q1: What are the effects of the tax exclusion (subsidy) of EHI on entrepreneurial choices and welfare? Q2: What is the optimal level of tax subsidy for EHI that minimizes welfare losses of the talent distortions? A: If imperfect information & no perfectly discriminating taxes: Tax deductible EHI premium regressive tax that improves talent allocation & welfare Optimally regressive tax: minimizes welfare loss from talent distortions