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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. Thomas J. Kniesner & W. Kip Viscusi & James P. Ziliak, 2009. "Policy Relevant Heterogeneity in the Value of Statistical Life: New Evidence from Panel Data Quantile Regressions," Center for Policy Research Working Papers 118, Center for Policy Research, Maxwell School, Syracuse University.
  2. 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.
  3. Torben Andersen, 2005. "Is there a Role for an Active Fiscal Stabilization Policy?," CESifo Working Paper Series 1447, CESifo Group Munich.
  4. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," NBER Working Papers 16275, National Bureau of Economic Research, Inc.
  5. Morissette, René & Ostrovsky, Yuri, 2009. "How Do Families and Unattached Individuals Respond to Layoffs? Evidence from Canada," CLSSRN working papers clsrn_admin-2009-49, Vancouver School of Economics, revised 25 Sep 2009.
  6. 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.
  7. Julie L. Hotchkiss & Robert E. Moore, 2007. "Assessing the welfare impact of the 2001 tax reform on dual-earner families," Working Paper 2007-27, Federal Reserve Bank of Atlanta.
  8. Alan Auerbach, 2002. "Is There a Role for Discretionary Fiscal Policy?," NBER Working Papers 9306, National Bureau of Economic Research, Inc.
  9. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series 2009-14, Board of Governors of the Federal Reserve System (U.S.).
  10. Reagan Baughman & Stacy Dickert-Conlin, 2009. "The earned income tax credit and fertility," Journal of Population Economics, Springer, vol. 22(3), pages 537-563, July.
  11. 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.
  12. 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.

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