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Subsidizing Medical Spending through the Tax Code: Take-Up, Targeting and the Cost of Claiming
The U.S. tax code partially subsidizes out-of-pocket medical spending as itemized medical deductions (IMDs). In this paper, using detailed information in the Health and Retirement Study, I find that while a substantial share of medical spending among older Americans is deducted through the tax code, take-up is incomplete: 61.8 (50.5) percent of potential tax savings (deductions) are claimed, resulting in lost tax savings of $5.4 billion annually. Further, frictions in take-up result in diverting tax savings from higher-need populations. I investigate potential mechanisms and estimate a discrete choice model to simulate eligibility, take-up and the implied cost of claiming under different policy counterfactuals. The results indicate that subsidizing medical expenses through the tax code imposes significant economic burdens, reducing the net subsidy available to taxpayers.
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