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Tax Reform and Automatic Stabilization

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  • Thomas J. Kniesner
  • James P. Ziliak

Abstract

An income tax provides implicit insurance by dampening the variability of disposable income and consumption. Using an empirical framework derived from the consumption insurance literature and data from the Panel Study of Income Dynamics we examine the effect of federal income tax reforms of the 1980's on automatic stabilization of consumption. Overall, ERTA and TRA86 reduced consumption stability by about 50 percent. Recently increased EITC generosity restored or enhanced consumption insurance. The welfare cost of moving to the post-TRA86 system is sizable for relatively risk-averse households facing large income risk but is much more modest for the typical household. (JEL H21)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 3 (June)
Pages: 590-612

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:3:p:590-612

Note: DOI: 10.1257/00028280260136264
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Citations

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Cited by:
  1. Alan J. Auerbach, 2002. "Is there a role for discretionary fiscal policy?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 109-150.
  2. Morissette, Rene & Ostrovsky, Yuri, 2008. "How Do Families and Unattached Individuals Respond to Layoffs? Evidence from Canada," Analytical Studies Branch Research Paper Series 2008304e, Statistics Canada, Analytical Studies Branch.
  3. Reagan Baughman & Stacy Dickert-Conlin, 2009. "The earned income tax credit and fertility," Journal of Population Economics, Springer, Springer, vol. 22(3), pages 537-563, July.
  4. Morissette, Rene & Ostrovsky, Yuri, 2008. "Comment les familles et les personnes seules reagissent-elles aux licenciements? Un eclairage canadien," Direction des etudes analytiques : documents de recherche 2008304f, Statistics Canada, Direction des etudes analytiques.
  5. Thomas Kniesner & W. Viscusi & James Ziliak, 2010. "Policy relevant heterogeneity in the value of statistical life: New evidence from panel data quantile regressions," Journal of Risk and Uncertainty, Springer, Springer, vol. 40(1), pages 15-31, February.
  6. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2009. "Automatic Stabilizers and Economic Crisis: US vs. Europe," IZA Discussion Papers 4310, Institute for the Study of Labor (IZA).
  7. Yang, Juan & Mitchell, Paul D. & Gray, Michael & Steffey, Kevin, 2007. "Unbalanced Nested Component Error Model and the Value of Soil Insecticide and Bt Corn for Controlling Western Corn Rootworm," Staff Paper Series 510, University of Wisconsin, Agricultural and Applied Economics.
  8. Ziliak, James P. & Hardy, Bradley & Bollinger, Christopher, 2011. "Earnings volatility in America: Evidence from matched CPS," Labour Economics, Elsevier, vol. 18(6), pages 742-754.
  9. Julie L. Hotchkiss & Robert E. Moore, 2007. "Assessing the welfare impact of the 2001 tax reform on dual-earner families," Working Paper, Federal Reserve Bank of Atlanta 2007-27, Federal Reserve Bank of Atlanta.
  10. Morissette, Rene & Ostrovsky, Yuri, 2005. "The Instability of Family Earnings and Family Income in Canada, 1986 to 1991 and 1996 to 2001," Analytical Studies Branch Research Paper Series 2005265e, Statistics Canada, Analytical Studies Branch.
  11. Torben Andersen, 2005. "Is there a Role for an Active Fiscal Stabilization Policy?," CESifo Working Paper Series 1447, CESifo Group Munich.
  12. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-14, Board of Governors of the Federal Reserve System (U.S.).

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