A reduction in the income base upon which Federal income tax is calculated. Health insurance expenditures are deductible by businesses as a business expense. Since the tax rate for most large businesses is 48 percent, this means there is a reduction of tax liability of nearly $1 for each $2 the business spends on health insurance. It is estimated that Federal tax receipts will be reduced by approximately $3.7 billion in 1976 because of business deductions of health insurance costs. Individuals also may take a medical deduction on their personal income tax of one-half the cost of health insurance premiums up to $150 plus all medical expenses and premiums that exceed 3 percent of income. Ai)proximately $2.6 billion in revenues will be lost to the Federal government as tax expenditures because of the individual medical expense deductions in 1976. Since the marginal tax rate is related to income and is higher for higher income persons and businesses, the value of a tax deduction for income spent on medical care increases as income increases; thus, the subsidy is effectively greater for the higher income person or more profitable corporation.
An amount which can be subtracted from the taxable income of an individual. Some health care reform proposals include tax deductions as a way to help the individual finance health care. Tax deductions save the individual less money than would the same amount taken as a tax credit.