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Evidence on the Insurance Effect of Redistributive Taxation

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  • Charles Grant

    (University of Reading)

  • Christos Koulovatianos

    (Department of Economics, University of Exeter and CFS)

  • Alexander Michaelides

    (London School of Economics 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 US states we investigate the necessary traces of these two effects in the data: that state-level measures of redistributive taxation should correlate negatively with, (a) the standard deviation, and (b) 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.

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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0809.

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Date of creation: 2008
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Handle: RePEc:exe:wpaper:0809

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Keywords: Undiversi¯able Earnings Risk; Consumption Insurance; Tax Distortions;

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References

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  1. Juan C. Conesa & Dirk Krueger, 2004. "Taxing Capital: Not a Bad Idea After All," 2004 Meeting Papers 403, Society for Economic Dynamics.
  2. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
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  5. Backus, David & Henriksen, Espen & Storesletten, Kjetil, 2008. "Taxes and the global allocation of capital," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 48-61, January.
  6. Robert Tannenwald, 2002. "Interstate fiscal disparity in 1997," New England Economic Review, Federal Reserve Bank of Boston, issue Q 3, pages 17-33.
  7. Douglas W. Elmendorf & Miles S. Kimball, 1996. "Taxation of labor income and the demand for risky assets," Finance and Economics Discussion Series 96-32, Board of Governors of the Federal Reserve System (U.S.).
  8. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  9. Floden, Martin, 2000. "The Effectiveness of Government Debt and Transfers as Insurance," Working Paper Series in Economics and Finance 377, Stockholm School of Economics.
  10. Costas Meghir & Luigi Pistaferri, 2001. "Income variance dynamics and heterogenity," IFS Working Papers W01/07, Institute for Fiscal Studies.
  11. 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.
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  13. Daniel R. Feenberg & Harvey S. Rosen, 1986. "State Personal Income and Sales Taxes, 1977- 1983," NBER Chapters, in: Studies in State and Local Public Finance, pages 135-186 National Bureau of Economic Research, Inc.
  14. Orazio Attanasio & Erich Battistin & Hidehiko Ichimura, 2004. "What Really Happened to Consumption Inequality in the US?," NBER Working Papers 10338, National Bureau of Economic Research, Inc.
  15. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, 05.
  16. Robert Tannenwald & Nicholas Turner, 2004. "Interstate fiscal disparity in state fiscal year 1999," Public Policy Discussion Paper 04-9, Federal Reserve Bank of Boston.
  17. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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Cited by:
  1. Achury, Carolina & Hubar, Sylwia & Koulovatianos, Christos, 2011. "Saving rates and portfolio choice with subsistence consumption," CFS Working Paper Series 2011/06, Center for Financial Studies (CFS).
  2. 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.
  3. Carolina Achury & Sylwia Hubar & Christos Koulovatianos, 2011. "Online Appendix to "Saving Rates and Portfolio Choice with Subsistence Consumption"," Technical Appendices 10-11, Review of Economic Dynamics.

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