Self-employed health insurance deduction: Nice tax break or gross inequity

Equity, one of the basic principles of public finance, is often a consideration in discussions of tax policy or tax reform. Otherwise largely ignored, this paper considers the horizontal equity position of the self-employed health insurance deduction. Enacted by the Tax Reform Act of 1986, lawmakers intended for this deduction to bring more parity to the self-employed taxpayer and the employed taxpayer. However, an illustration comparing a self-employed taxpayer to an employed taxpayer in similar situations demonstrates that the two are taxed inequitably. This paper also illustrates a simple solution to bring more fairness to this deduction.