Will Tax-Based Health Insurance Reforms Help the Self-Employed Stay in Business?

The self-employed face a tax-induced disadvantage relative to wage and salary workers when it comes to the payment of health insurance premiums. This paper uses a panel of individual tax return data to test whether lower health insurance premium costs because of an expanded tax incentive result in longer periods of self-employment. The results suggest that households claiming the deduction are indeed less likely to exit self-employment. Equalizing the treatment of health insurance premiums for the self-employed and wage workers by allowing full deductibility from Self-Employment Contributions Act (SECA) taxes would result in a 7% decrease in the probability of exit. (JEL H32, I18, L26)