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A Note on Taxation as Social Insurance for Uncertain Labor Income


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  • Louis Kaplow


Various authors, notably Eaton and Rosen (1980a) and Varian (1980), have proposed that income taxation may be justified to some extent on the ground that it serves as social insurance against uncertainties in labor income. They assume that private insurance is unavailable. primarily because of moral hazard, and demonstrate that some taxation is efficient because the benefits of mitigating risk exceed incentive costs. This note suggests that private insurance should be considered explicitly in examining this question. Moral hazard problems limiting private insurance coverage are not alleviated by government insurance. Moreover, in the presence of moral hazard, government insurance, through labor income taxation or otherwise, may be an inefficient policy because private insurance decisions are distorted. More traditional justifications for redistributive taxation are unaffected by this argument.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3708.

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Date of creation: May 1991
Date of revision:
Publication status: published as Public Finance, vol. 49, pp. 111-123, (1994).
Handle: RePEc:nbr:nberwo:3708

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Cited by:
  1. Holger Strulik, 2013. "School Attendance And Child Labor—A Model Of Collective Behavior," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 11(2), pages 246-277, 04.
  2. Sinn, Hans-Werner, 1996. "Social Insurance, Incentives and Risk Taking," Munich Reprints in Economics, University of Munich, Department of Economics 19834, University of Munich, Department of Economics.
  3. Douglas W. Elmendorf & Miles S. Kimball, 1996. "Taxation of labor income and the demand for risky assets," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 96-32, Board of Governors of the Federal Reserve System (U.S.).
  4. Buiter, Willem H & Kletzer, Kenneth, 1992. "Government Solvency, Ponzi Finance and the Redundancy and Usefulness of Public Debt," CEPR Discussion Papers, C.E.P.R. Discussion Papers 680, C.E.P.R. Discussion Papers.
  5. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 56(2), pages 291-310, February.


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