In recent years governments have taken measures to reduce or reverse tax in-centives in Austria, Greece, Ireland, Italy, Spain and the United Kingdom. Por-tugal is the only member state to have increased tax incentives for individu-als to purchase VHI.
The Austrian government reduced tax incentives in 1996 by limiting tax re-lief to people earning less than a specified amount per year (Bennett, Schwartz, Marberger, 1993). In 1999 they also reduced the tax deductible amount from Section 2 The market for VHI in the European Union
100% to 25% of the cost of VHI premiums and imposed a ceiling on the de-ductible amount ( CEA, 1999; Hofmarcher, 2001). Tax relief for VHI premiums in Greece was introduced in 1992, but in 1997 the government imposed a ceil-ing on the amount deductible from income tax (Economou, 2001). Until 1992, tax relief on VHI premiums in Italy was applied at the marginal tax rate; its ef-fect was therefore regressive (Dirindin, 1996). In 1992 the Italian government reduced tax relief on commercial group and all mutual VHI premiums from the marginal to the standard rate of tax. In 1999 increased tax relief was established for contributions paid to the complementary national health service funds (as opposed to for other types of VHI contributions), and it is being applied in in-creasing annual increments through 2005 (Giannoni-Mazzi, 2001). The Spanish government abolished tax relief of 15% of all medical expenses, including VHI premiums, in 1999 (Freire, 1999; Rodríguez, 2001). At the same time the govern-ment introduced tax relief for firms purchasing VHI on behalf of their employ-ees (see Table 16). The abolition of tax relief for individuals does not appear to have had any negative effect on the demand for individual VHI policies in Spain ( Rodríguez, 2001).
Tax relief provides a large government subsidy to VHI in Ireland, but in re-cent years its effect has diminished, partly because it changed from being ap-plied at the marginal tax rate to being apap-plied at the standard tax rate in 1994 (as in Italy in 1992), and partly due to reductions in the standard rate of in-come tax during the late 1990s. During the 1970s, 1980s and early 1990s full tax relief for VHI premiums was available at the marginal rate of income tax (27% or 48% in 1994) (Harmon and Nolan, 2001). The importance of this relief increased as both tax rates and the number of perople paying the top rate of tax rose through the 1980s (Harmon, Nolan, 2001). At the same time, the 1982 Commission on Taxation and the 1989 Commission on Health Funding ques-tioned the availability of tax relief on the grounds that it was neither equita-ble nor effective, and recommended that it be abolished (Commission on Tax-ation, 1982; Commission on Health Funding, 1989). However, the Finance Act of 1994 only went so far as to reduce relief to the standard rate of income tax (27%) (Department of Health and Children, 1999).
The standard rate of tax fell from 27% to 24% in 1998, to 22% in 2000 and to 20% in 2001. Since 2001, tax relief for VHI premiums has been granted at source (that is, instead of individuals claiming a 20% tax rebate at the end of the year, the amount paid to the insurer is simply reduced by 20%, and the onus is on the insurer to claim the tax back from the government). The Irish Revenue Commissioners have recently decided that VHI premiums for primary care products will also benefit from tax relief at the standard rate of 20% ( Vhi Healthcare, 2001c).
Tax relief on VHI premiums costs the Irish government around €79 million a year (the equivalent of 2.5% of public expenditure on health in 1997), but
93 there are no plans to withdraw, it as it is calculated that this would increase the net cost of premiums by as much as 32% (Department of Health and Children, 1999). However, the change from the marginal to the standard rate of tax and reductions in the standard rate of income tax alone would have doubled the net cost of VHI premiums to Irish subscribers since the mid 1980s, even if the gross price had not increased at all (Harmon, Nolan, 2001). Reductions in the net val-ue of tax relief do not appear to have negatively affected the demand for VHI in Ireland, as the proportion of the population covered by VHI has increased from 21.8% in 1979 to 37.3% in 1994 and 45.5% in 2001 (Department of Health and Children, 2001b). Nevertheless, in its submission to this study Vhi Healthcare noted that tax relief on VHI premiums may be “one of the main reasons for the high take-up of insurance in Ireland” ( Vhi Healthcare, 2001c).
In 1990 the British government introduced tax relief on VHI premiums for individuals 60 and older. It was subsequently abolished by the incoming government in 1997, because research showed that in spite of annual public spending of £135 million (€214 million) on these incentives, the number of VHI subscribers rose by only 50 000 in seven years (a total increase of 1.6%) (Department of Health, 2000). Although the industry claims otherwise, it is also unlikely that the cost of this government subsidy to VHI is less than the public (NHS) expenditure saved. According to recent estimates at least an ad-ditional 1.8 million individuals would have to take out VHI (equivalent to a 28% growth in coverage) for a subsidy to all adults, equal to the basic rate of income tax, to be self-financing (Emmerson, Frayne, Goodman, 2000; Em-merson, Frayne, Goodman, 2001). However, if the health care provided by the NHS actually costs less than the health care provided by VHI (and Department of Health statistics suggest that NHS costs for treatment such as cataract ex-tractions and hip replacements are approximately a third less than the same treatment in the private sector), then an additional 3.1 million VHI subscrib-ers would be needed to make the tax subsidy self-financing (Emmsubscrib-erson et, Frayne, Goodman, 2001). The evidence from the United Kingdom suggests that tax incentives aimed at individuals does not appear to be particularly success-ful in encouraging more people to purchase VHI, although the abolition of tax relief in 1997 may have caused some elderly people to give up their VHI pol-icies. Emmerson, Frayne, Goodman use multivariate analysis to estimate that the abolition of tax relief reduced coverage among those aged 60 and older by 0.7% (a reduction in coverage of 4 000 people) (Emmerson, Frayne, Goodman, 2001). They conclude that although this would have led to some increase in demand for NHS services, it would be much less costly than the £135 million (€214 million) saved by the abolition of the government subsidy.
As we noted above, Portugal has been the only member state to increase tax incentives for individuals. In 1999 the Portuguese government passed new leg-islation to establish a tax-deductible amount exclusively for VHI premiums,
Section 2 The market for VHI in the European Union
which had previously been capped at approximately €348 for all types of in-surance premiums (Dixon, Mossialos, 2000). Twenty-five per cent of the cost of VHI premiums can now be deducted from income tax (rather than taxable in-come) up to a ceiling of €70 or €140 for single people and married couples re-spectively, plus an additional €35 for each dependant (Oliveira, 2001).
Finally, VHI may permit employers to provide employees with tax-free in-come where policies provided to employees (by employers) as a benefit in kind are not subject to tax. VHI policies are only subject to benefit-in-kind tax in Ireland and the United Kingdom (see below), which means that employer-paid group VHI policies in most member states provide employees with an untaxed benefit in kind.