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Social Insurance, Incentives and Risk Taking

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  • Sinn, Hans-Werner

Abstract

From the perspective of parents, redistributive taxation can be seen as social insurance for their children, for which no private alternative exists. Because private insurance comes too late during a person’s life, it cannot cover the same risks as social insurance. Empirically, 85\% of social insurance covers risks for which no private insurance would have been available. Redistributive taxation can be efficiency enhancing, because it creates safety and because it stimulates income generating risk taking. However, it also brings about detrimental moral hazard effects. Both the enhancement of risk taking and the moral hazard effects tend to increase the inequality in the economy, and, under constant returns to risk taking, this increase is likely to be strong enough even to make the net-of-tax income distribution more unequal. Optimal redistributive taxation will either imply that the pie becomes bigger when there is less inquality in pre-tax incomes or that more redistribution creates more post-tax inequality.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19834.

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Date of creation: 1996
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Publication status: Published in International Tax and Public Finance 3 3(1996): pp. 259-280
Handle: RePEc:lmu:muenar:19834

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References

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  1. Jeremy I. Bulow & Lawrence H. Summers, 1982. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
  2. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  3. Kai A. Konrad, 1991. "Risk Taking and Taxation in Complete Capital Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(2), pages 167-177, December.
  4. Mirrlees, J. A., 1995. "Private risk and public action: The economics of the welfare state," European Economic Review, Elsevier, vol. 39(3-4), pages 383-397, April.
  5. BOADWAY, Robin W. & WILDASIN, David E., . "Optimal tax-subsidy policies for industrial adjustment to uncertain shocks," CORE Discussion Papers RP -889, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Sinn, Hans-Werner, 1995. " A Theory of the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 495-526, December.
  7. Kanbur, S M, 1979. "Of Risk Taking and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 769-97, August.
  8. Barr, Nicholas, 1992. "Economic Theory and the Welfare State: A Survey and Interpretation," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 741-803, June.
  9. Louis Kaplow, 1991. "A Note on Taxation as Social Insurance for Uncertain Labor Income," NBER Working Papers 3708, National Bureau of Economic Research, Inc.
  10. Christiansen, V., 1990. "Subsidization Of Risky Investment Under Income Taxation And Moral Hazard," The Warwick Economics Research Paper Series (TWERPS) 357, University of Warwick, Department of Economics.
  11. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  12. Sinn, Hans-Werner, 1986. "Risiko als Produktionsfaktor," Munich Reprints in Economics 19879, University of Munich, Department of Economics.
  13. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434.
  14. Kaplow, Louis, 1992. "Income Tax Deductions for Losses as Insurance," American Economic Review, American Economic Association, vol. 82(4), pages 1013-17, September.
  15. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
  16. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  17. Ahsan, Syed M., 1976. "Taxation in a two-period temporal model of consumption and portfolio allocation," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 337-352.
  18. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
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  1. Allemaal dankzij de verzekering
    by Thijs in eco.nomie.nl on 2008-07-04 09:23:03
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