Do healthcare tax credits help poor healthy individuals on low incomes?

In several countries, personal income tax permits tax credits for out-of-pocket healthcare expenditures. Tax credits produce two effects on taxpayers' disposable income. On the one hand, they benefit taxpayers at all income levels by reducing their net tax liability; on the other hand, they modify the price of out-of-pocket expenditure and, to the extent that consumer demand is price elastic, they may influence the amount of eligible healthcare expenditure for which taxpayers may claim a credit. These two effects influence, in turn, income redistribution and may affect taxpayers' health status and therefore income-related inequality in health. Redistributive consequences of tax credits have been widely investigated; however, little is known about the ability of tax credits to ensure a more equitable distribution of healthcare expenditure and, consequently, to alleviate health inequality. In this paper, we study the potential effects that tax credits for health expenses may have on health-related inequality with reference to the Italian institutional setting. The analysis is performed using a tax-benefit microsimulation model which reproduces the personal income tax and incorporates taxpayers' behavioural responses to changes in tax credit rate. Our results suggest that a healthcare tax credit design that does not rely on income, like the one implemented in the Italian personal income tax, is not effective in improving equity in health and tends to favour the richest part of the population.