ECONOMIC REPORT OF THE PRESIDENT

Share of Income Required to Purchase Employer-Sponsored
Plan with Average Premium, 2008
Share of Income
100
90
80
70
60
50
40
30
20
10
0
Single
Family of Four
Figure 4-2
0 100 200 300 400 500 600
Income as Percent of Federal Poverty Level
Source: KFF/HRET Employer Health Benefits Survey; CEA calculations.
insurance is excluded from payroll and income taxation. The Federal marginal
tax rate on labor income averages around 35 percent, so for each dollar
of compensation a family received in the form of health insurance instead of
wages, the family saved 35 cents in Federal taxes, reducing the effective cost
of that dollar of health insurance coverage to just 65 cents.3 This favorable
tax treatment played a central role in making coverage affordable for many
middle- and upper-middle class families.4
However, the tax benefit for employer-sponsored coverage was inadequate
to make coverage affordable for many low- and moderate-income
families. As depicted in Panels A and B of Figure 4-3, the likelihood of having
private insurance from any source fell sharply with income. Bipartisan
efforts during the 1980s and 1990s had made significant progress in filling
these gaps for low- and moderate-income children by broadening eligibility
for Medicaid and creating the Children’s Health Insurance Program (CHIP).
3 The Federal marginal tax rate reported here was estimated using data from Urban-Brookings
Tax Policy Center Tables T13-0253 and T14-0091. States also generally exclude employerprovided
health insurance coverage from taxation, so the value of the tax subsidy is somewhat
larger than reported here.
4 While this favorable tax treatment played an important role in making coverage affordable
for many families, its unlimited nature also encouraged some employers to offer inefficient
and overly generous plans. The ACA introduced a tax reform that maintains this tax benefit,
but mitigates the inefficiencies created by its unlimited nature; this reform is discussed in the
second half of the chapter.
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