Gopi Shah Goda, Brookings Institute

Subsidizing Medical Spending through the Tax Code: Take-Up, Targeting and the Cost of Claiming


Abstract

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.


Dr. Gopi Shah Goda is the director of the Retirement Security Project, the Alice M. Rivlin Chair in Economic Policy, and senior fellow in Economic Studies at the Brookings Institution. She is also a research associate at the National Bureau of Economic Research (NBER) and a fellow of the Society of Actuaries.

Dr. Goda conducts research that informs how policy can best serve aging societies, including how individuals make healthcare, saving and retirement decisions as they age and the sustainability of public programs serving older populations. Her work has appeared in a variety of leading economics journals, has garnered coverage in major media outlets, and has frequently been cited in policy discourse, including government reports, agency rulemaking, and by legislative bodies.

Dr. Goda served as a senior economist at the White House Council of Economic Advisers from July 2021 to July 2022, and was on California Governor Gavin Newsom’s Council of Economic Advisors from January to August 2024.

You can read more about Gopi Shah Goda here

CEBI contact: Torben Heien Nielsen