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The insurance value of state tax-and-transfer programs

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Author Info

  • Hoynes, Hilary W.
  • Luttmer, Erzo F.P.

Abstract

This paper estimates the total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the role of changes in tax-and-transfer programs, demographics, and income in the value of state net benefits over a period of more than 30years. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value is increasing in income. The resulting total value still declines with income, but not nearly as sharply as the redistributive value. Hence, the insurance value mitigates the incentives for mobility that would “undo” state redistributive spending.

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File URL: http://www.sciencedirect.com/science/article/pii/S004727271100096X
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 95 (2011)
Issue (Month): 11 ()
Pages: 1466-1484

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Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1466-1484

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: Fiscal federalism; Redistribution; Tax-and-transfer programs;

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  1. Rebecca M. Blank, 2001. "What Causes Public Assistance Caseloads to Grow?," Journal of Human Resources, University of Wisconsin Press, vol. 36(1), pages 85-118.
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Cited by:
  1. Hoynes, Hilary W. & Luttmer, Erzo F.P., 2012. "Reprint of: The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, vol. 96(11), pages 1110-1128.

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