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Evidence on the Insurance Effect of Redistributive Taxation

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  • Charles Grant

    (University of Reading)

  • Christos Koulovatianos

    (University of Nottingham and CFS)

  • Alexander Michaelides

    (LSE and CEPR)

  • Mario Padula

    (University "Ca' Foscari" of Venice and CSEF)

Abstract

If households face uninsurable idiosyncratic earnings risk, theory predicts that redistributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across U.S. states and over time, we investigate the necessary traces of these two effects in the data: that state-level measures of redistributive taxation should correlate negatively with the standard deviation and the mean of the within-state consumption distribution. We find that the first correlation is robust, supporting strongly the presence of an insurance effect. The distortionary effect can also be detected in the data, but it is less precisely estimated. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 92 (2010)
Issue (Month): 4 (November)
Pages: 965-973

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Handle: RePEc:tpr:restat:v:92:y:2010:i:4:p:965-973

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Cited by:
  1. Carolina Achury & Sylwia Hubar & Christos Koulovatianos, . "Saving Rates and Portfolio Choice with Subsistence Consumption," Discussion Papers, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) 10/01, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Carolina Achury & Sylwia Hubar & Christos Koulovatianos, 2011. "Online Appendix to "Saving Rates and Portfolio Choice with Subsistence Consumption"," Technical Appendices, Review of Economic Dynamics 10-11, Review of Economic Dynamics.
  3. Hoynes, Hilary W. & Luttmer, Erzo F.P., 2012. "Reprint of: The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, Elsevier, vol. 96(11), pages 1110-1128.

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