Including health benefits as part of the tax and transfer system presents a daunting
technical task, but health benefits represent such a significant share of the social welfare
budget that they should be taken into account. Giannarelli and Steuerle (1995) assigned
an insurance value to Medicaid coverage to individuals of the CPS population based
on their demographic and residence characteristics. Coverage by state health programs
generally has “cliff effects” on eligibility and “spike effects” on marginal tax rates: as
individuals pass some eligibility threshold, they or their children lose coverage which
is valued at some (large) constant amount. These effects tend to mask the impact, for
instance, when graphs or calculations imply that only those who are right at the cliff are
affected. For instance, a marginal rate of 30 percent may be followed one dollar later
by the loss of thousands of dollars’ worth of Medicaid (implying a marginal tax rate of
100,000 percent per each thousand dollar loss), followed one dollar later by an effective
marginal tax rate of 30 percent. Obviously, the equity and behavioral effects of the loss
of Medicaid stretch over a much wider income range than this one dollar of income.