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Taxation and Inequality: Active and Passive Channels

Author

Listed:
  • Estelle Dauchy

    (Campaign for Tobacco Free Kids)

  • Francisco Navarro-Sanchez

    (University of Utah)

  • Nathan Seegert

    (University of Utah)

Abstract

This paper fills an important gap in our understanding of the role of the US tax system in changing household welfare and inequality. It deconstructs the mechanisms by which the federal income tax system operates to affect the transmission of income shocks to consumption, and therefore, consumption inequality. To this end, it links micro and macro models of the distribution of income and consumption to changes in the federal income tax system. We find important changes in the types of income shocks to which consumers are insured or not, as well as the extent to which tax policy contributes to insuring consumers from these shocks. Importantly, we find that without decomposing the tax system into the three mechanisms outlined in the model, economists might have erroneously inferred that the role of tax policy as a mechanism for consumption insurance did not change over time. We also find that tax policy changes have disproportional effects across socioeconomic groups, and that this contributes to increasing inequality. (Copyright: Elsevier)

Suggested Citation

  • Estelle Dauchy & Francisco Navarro-Sanchez & Nathan Seegert, 2021. "Taxation and Inequality: Active and Passive Channels," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 156-177, October.
  • Handle: RePEc:red:issued:19-189
    DOI: 10.1016/j.red.2020.10.004
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    More about this item

    Keywords

    Inequality; Personal income taxation; Income risk; Consumption;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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