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Evidence on the Insurance Effect of Redistributive Taxation

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  • Christos Koulovatianos
  • Charles Grant
  • Alex Michaelides
  • Mario Padula

Abstract

If households face uninsurable idiosyncratic earnings risk, theory predicts that re- distributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across US 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, (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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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 09/08.

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Handle: RePEc:not:notcfc:09/08

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Keywords: Undiversifiable Earnings Risk; Consumption Insurance; Tax Distortions.;

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  1. 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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  8. Martin Floden, 2000. "The Effectiveness of Government Debt and Transfers as Insurance," Econometric Society World Congress 2000 Contributed Papers 1013, Econometric Society.
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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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