Most federal tax revenues come from income taxes. Therefore, to predict its tax collections accurately, the U.S. government must accurately forecast GDP. The government has never performed this task very well, however, so its tax revenue projections are notoriously inaccurate. Another problem has emerged in the 2000s that caused an overprediction of income tax collections. Under U.S. tax laws, workers pay taxes on income they receive via paychecks or direct deposits to their bank accounts. They do not, however, owe income taxes on any portion of their incomes that is withheld to pay for their contributions to employer-provided health plans. Before 2002, workers’ incomes and health benefit contributions typically increased at the same pace from year to year. After 2003, this pattern changed. Many workers agreed to accept lower wage and salary increases in exchange for enhanced health benefits. Nontaxable worker contributions to health care plans rose twice as fast as taxable incomes. The result was a smaller increase in total taxable earnings than the government had forecast. Consequently, the government overstated the amount of income tax revenues that it would collect.

In the debate concerning the new national health care bill passed, some congressmen proposed making health care benefits taxable. What would be the likely effect of such a plan on aggregate demand?