16: Tax Incentives and the Demand for Private Health Insurance

Author(s):

Olena Stavrunova, Economics Discipline Group, University of Technology Sydney, Sydney, Australia
Oleg Yerokhin, University of Wollongong

Date of publication: November 2013

Working paper number: 16

Abstract: This paper studies the effect of an individual insurance mandate (Medicare Levy Surcharge) on the demand for private health insurance (PHI) in Australia. It uses the administrative income tax returns data to show that mandate has several distinct effects on taxpayers' behavior. First, despite the large size of the tax penalty for not having PHI cover relative to the cost of the cheapest eligible insurance policy, the compliance with mandate is relatively low: the proportion of population with PHI cover increases by 6.5 percentage points (15.6%) at the income threshold at which the tax penalty starts to apply. This effect is most pronounced for young age taxpayers, while the middle aged people seem to be least responsive to this specifi c tax incentive. Second, the discontinuous increase in the average tax rate at the income threshold created by the policy generates a strong incentive for tax avoidance which manifests itself through bunching in the taxable income distribution below the threshold. Finally, after imposing some plausible assumptions the eff ect of the policy is extrapolated to other income levels to show that overall this policy hasn't had a significant impact on the demand for private health insurance in Australia.

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Acknowledgement of Country

UTS acknowledges the Gadigal people of the Eora Nation, the Boorooberongal people of the Dharug Nation, the Bidiagal people and the Gamaygal people, upon whose ancestral lands our university stands. We would also like to pay respect to the Elders both past and present, acknowledging them as the traditional custodians of knowledge for these lands.