IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v95y2011i11p1466-1484.html
   My bibliography  Save this article

The insurance value of state tax-and-transfer programs

Author

Listed:
  • Hoynes, Hilary W.
  • Luttmer, Erzo F.P.

Abstract

This paper estimates the total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the role of changes in tax-and-transfer programs, demographics, and income in the value of state net benefits over a period of more than 30years. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value is increasing in income. The resulting total value still declines with income, but not nearly as sharply as the redistributive value. Hence, the insurance value mitigates the incentives for mobility that would “undo” state redistributive spending.

Suggested Citation

  • Hoynes, Hilary W. & Luttmer, Erzo F.P., 2011. "The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, vol. 95(11), pages 1466-1484.
  • Handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1466-1484 DOI: 10.1016/j.jpubeco.2011.06.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S004727271100096X
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. John Kennan & James R. Walker, 2011. "The Effect of Expected Income on Individual Migration Decisions," Econometrica, Econometric Society, vol. 79(1), pages 211-251, January.
    2. Boadway, Robin & Tremblay, Jean-François, 2012. "Reassessment of the Tiebout model," Journal of Public Economics, Elsevier, pages 1063-1078.
    3. Roland Benabou & Efe A. Ok, 2001. "Social Mobility and the Demand for Redistribution: The Poum Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 447-487.
    4. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2010. "Evidence on the Insurance Effect of Redistributive Taxation," The Review of Economics and Statistics, MIT Press, pages 965-973.
    5. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 831-877.
    6. repec:ucp:bknber:9780226533568 is not listed on IDEAS
    7. Jeffrey R. Brown, 2003. "Redistribution and Insurance: Mandatory Annuitization With Mortality Heterogeneity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 17-41.
    8. Buchanan, James M., 1976. "Taxation in fiscal exchange," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 17-29.
    9. Feldstein, Martin & Wrobel, Marian Vaillant, 1998. "Can state taxes redistribute income?," Journal of Public Economics, Elsevier, pages 369-396.
    10. Gruber, Jonathan, 2000. "Cash welfare as a consumption smoothing mechanism for divorced mothers," Journal of Public Economics, Elsevier, vol. 75(2), pages 157-182, February.
    11. Baicker, Katherine & Clemens, Jeffrey & Singhal, Monica, 2012. "The rise of the states: U.S. fiscal decentralization in the postwar period," Journal of Public Economics, Elsevier, pages 1079-1091.
    12. Rebecca M. Blank, 2001. "What Causes Public Assistance Caseloads to Grow?," Journal of Human Resources, University of Wisconsin Press, pages 85-118.
    13. Hoynes, Hilary W. & Luttmer, Erzo F.P., 2011. "The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, pages 1466-1484.
    14. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-473, June.
    15. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
    16. Bruce D. Meyer & Wallace K. C. Mok & James X. Sullivan, 2009. "The Under-Reporting of Transfers in Household Surveys: Its Nature and Consequences," NBER Working Papers 15181, National Bureau of Economic Research, Inc.
    17. Gordon, Roger H. & Cullen, Julie Berry, 2012. "Income redistribution in a Federal system of governments," Journal of Public Economics, Elsevier, pages 1100-1109.
    18. Robert A. Moffitt, 2003. "Means-Tested Transfer Programs in the United States," NBER Books, National Bureau of Economic Research, Inc, number moff03-1, January.
    19. Gordon, Roger H. & Cullen, Julie Berry, 2012. "Income redistribution in a Federal system of governments," Journal of Public Economics, Elsevier, pages 1100-1109.
    20. 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.
    21. Jon Bakija, 2006. "Documentation for a Comprehensive Historical U.S. Federal and State Income Tax Calculator Program," Department of Economics Working Papers 2006-02, Department of Economics, Williams College, revised Aug 2009.
    22. Robert A. Moffitt, 2003. "Introduction to "Means-Tested Transfer Programs in the United States"," NBER Chapters,in: Means-Tested Transfer Programs in the United States, pages 1-14 National Bureau of Economic Research, Inc.
    23. Paul W. Rhode & Koleman S. Strumpf, 2003. "Assessing the Importance of Tiebout Sorting: Local Heterogeneity from 1850 to 1990," American Economic Review, American Economic Association, vol. 93(5), pages 1648-1677, December.
    24. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
    25. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Peter Levell & Barra Roantree & Jonathan Shaw, 2017. "Mobility and the lifetime distributional impact of tax and transfer reforms," IFS Working Papers W17/17, Institute for Fiscal Studies.
    2. Ammar Farooq & Adriana Kugler, 2016. "Beyond Job Lock: Impacts of Public Health Insurance on Occupational and Industrial Mobility," NBER Working Papers 22118, National Bureau of Economic Research, Inc.
    3. Hossein Askari & Abbas Mirakhor, 2014. "Risk sharing, public policy and the contribution of Islamic finance," PSL Quarterly Review, Economia civile, vol. 67(271), pages 345-379.
    4. Hoynes, Hilary W. & Luttmer, Erzo F.P., 2012. "Reprint of: The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, pages 1110-1128.
    5. Sonja Settele & Reyn van Ewijk, 2017. "The effect of cigarette taxes during pregnancy on educational outcomes of the next generation," IAAEU Discussion Papers 201703, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    6. Hoynes, Hilary W. & Luttmer, Erzo F.P., 2011. "The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, pages 1466-1484.

    More about this item

    Keywords

    Fiscal federalism; Redistribution; Tax-and-transfer programs;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:95:y:2011:i:11:p:1466-1484. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.