Tax subsidies,the rational demand for insurance and the health care crisis

An individual's optimal insurance coverage depends on balancing his gain through avoiding risk against his loss through the distortion of demand. The U.S. tax system subsidizes the purchase of excessive health insurance by excluding employer premium payments from employees' taxable incomes and by permitting the deduction of a portion of individual premiums. The current operational model of demand for health insurance shows that the tax subsidy does substantially increase insurance coverage. Since much of the rise in health care costs can be attributed to the growth of insurance, the tax subsidy is responsible for much of what is widely perceived as a health care crisis.