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Reprint of: The insurance value of state tax-and-transfer programs

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  • 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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Bibliographic Info

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

Volume (Year): 96 (2012)
Issue (Month): 11 ()
Pages: 1110-1128

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Handle: RePEc:eee:pubeco:v:96:y:2012:i:11:p:1110-1128

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

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

References

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  1. Jeffrey R. Brown, 2003. "Redistribution and Insurance: Mandatory Annuitization With Mortality Heterogeneity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 17-41.
  2. Roland Bénabou & Efe A. Ok, 2001. "Social Mobility And The Demand For Redistribution: The Poum Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 447-487, May.
  3. Bruce D. Meyer & Wallace K. C. Mok & James X. Sullivan, 2009. "The Under-Reporting of Transfers in Household Surveys: Its Nature and Consequences," NBER Working Papers 15181, National Bureau of Economic Research, Inc.
  4. Feldstein, Martin & Wrobel, Marian Vaillant, 1998. "Can state taxes redistribute income?," Journal of Public Economics, Elsevier, vol. 68(3), pages 369-396, June.
  5. Paul W. Rhode & Koleman S. Strumpf, 2003. "Assessing the Importance of Tiebout Sorting: Local Heterogeneity from 1850 to 1990," American Economic Review, American Economic Association, vol. 93(5), pages 1648-1677, December.
  6. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
  7. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  8. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 831-877, 05.
  9. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2008. "Evidence on the Insurance Effect of Redistributive Taxation," Discussion Papers 0809, Exeter University, Department of Economics.
  10. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  11. John Kennan & James R. Walker, 2011. "The Effect of Expected Income on Individual Migration Decisions," Econometrica, Econometric Society, vol. 79(1), pages 211-251, 01.
  12. Gruber, Jonathan, 2000. "Cash welfare as a consumption smoothing mechanism for divorced mothers," Journal of Public Economics, Elsevier, vol. 75(2), pages 157-182, February.
  13. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
  14. Hilary W. Hoynes & Erzo F.P. Luttmer, 2010. "The Insurance Value of State Tax-and-Transfer Programs," NBER Working Papers 16280, National Bureau of Economic Research, Inc.
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