In this Wall Street Journal ($) op-ed, economists John Cogan, Glenn Hubbard and Daniel Kessler make their pitch to make all health insurance tax deductible, not just employer-provided health insurance. This earlier post noted Messrs. Cogan, Hubbard, and Kessler’s earlier proposal on this topic, and it is a simple and common sense component of any overhaul of the American health care finance system. That’s probably why we did not hear either candidate propose it during the just completed Presidential campaign.
Messrs. Cogan, Hubbard, and Kessler note that the discrimination in the tax laws regarding health insurance has the following negative market effect:

The most important effect of tax deductibility would be to reduce unproductive health spending. Under current law, medical care purchased through an employer’s 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-copayment insurance instead of out-of-pocket, which in turn leads to cost-unconsciousness and wasteful medical practices. In addition, the tax preference for insurance creates incentives for the health-care system to rely on gatekeepers rather than deductibles and copayments when it does try to control costs. The cost of gatekeepers are financed out of insurance premiums that are paid with before-tax dollars; deductibles and copayments are paid with after-tax dollars.

On the other hand, Arnold Kling notes that providing a tax deduction for individual health insurance policies may simply change the problem. By allowing individuals to deduct health care expenses, a trend would likely occur toward disintermediation in health insurance — that is, more young and healthy workers will opt out of company-provided health insurance, which will leave businesses covering a relatively high-risk population that cannot afford individual policies.