Two Wrongs Do Not Make a Right

This paper analyzes proposals to remedy tax-induced distortions in health care by using new tax incentives and retaining all of the existing distortionary tax incentives. In the process of remedying some distortions, this approach magnifies others--most notably increasing the total tax preference for health care. The paper considers two examples--the Bush administration's FY 2007 budget proposal and a plan by Cogan, Hubbard and Kessler (2005)--and shows that both could result in higher health spending and reduced welfare. Finally, the paper discusses the circumstances in which tax incentives could be warranted to remedy market failures in health insurance.