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The current federal system of tax law, in attempting to encourage the shift of assets from private individuals to charitable organizations, fails to reach significant portions of Americans. Not all donors are equal in the eyes of the law; donors with particular demographic characteristics—ranging from income, to race, to state of residence—are more likely to itemize than others. Despite its aim to reflect a pluralistic society, the charitable deduction sanctions the privileging of one-third of American voices over the rest. If taxes are ballots, the election is rigged.

In recent years, employees have been shouldering an increasing share of the costs of traditional employer-provided health insurance. At the same time, more and more employers have been allowing employees to pay their out-of-pocket health care costs using pre-tax earnings, through tax-subsidized flexible spending accounts (FSAs). We use a cross-section of firm-level data from 1993 to show empirically that these FSAs can explain a significant fraction of the shift in health care costs to employees, and to evaluate the welfare impact of this shift. Correcting for selection effects, we find that FSAs are associated with insurance contracts with coinsurance rates that are about 7 percentage points higher, relative to a sample average coinsurance rate of 17 percent. Meanwhile, coinsurance rates net of the subsidy are approximately unchanged, providing evidence that FSAs are welfare-neutral.