IDEAS home Printed from https://ideas.repec.org/a/wly/jmoncb/v52y2020i2-3p505-530.html
   My bibliography  Save this article

The Effectiveness of Consumption Taxes and Transfers as Insurance Against Idiosyncratic Risk

Author

Listed:
  • TOMOYUKI NAKAJIMA
  • SHUHEI TAKAHASHI

Abstract

We quantitatively evaluate the effectiveness of a consumption tax and lump‐sum transfer program as insurance against idiosyncratic earnings risk. We use a heterogeneous agent, incomplete markets model in which households adjust savings and employment in each period in the presence of idiosyncratic productivity risk and a borrowing constraint. The model is calibrated to the U.S. economy. We find a weak insurance effect of the consumption tax and transfer program. Expanding the tax and transfer program from the current U.S. level increases the capital‐output ratio and reduces the interest rate. Consumption inequality also decreases only slightly.

Suggested Citation

  • Tomoyuki Nakajima & Shuhei Takahashi, 2020. "The Effectiveness of Consumption Taxes and Transfers as Insurance Against Idiosyncratic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 505-530, March.
  • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:2-3:p:505-530
    DOI: 10.1111/jmcb.12597
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jmcb.12597
    Download Restriction: no

    File URL: https://libkey.io/10.1111/jmcb.12597?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Krusell, Per & Mukoyama, Toshihiko & Rogerson, Richard & Sahin, Aysegül, 2011. "A three state model of worker flows in general equilibrium," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1107-1133, May.
    2. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    3. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2012. "The Laffer Curve in an Incomplete-Market Economy," IDEI Working Papers 707, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2013.
    4. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 1039-1073.
    5. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    6. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, February.
    7. Yongsung Chang & Sun-Bin Kim, 2007. "Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 97(5), pages 1939-1956, December.
    8. Martin Floden & Jesper Lindé, 2001. "Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 406-437, July.
    9. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    10. Sagiri Kitao, 2011. "Macroeconomic And Redistributional Effects Of Consumption Taxes In The Usa," The Japanese Economic Review, Japanese Economic Association, vol. 62(1), pages 63-81, March.
    11. Yonsung Chang & Sun-Bin Kim & Kyooho Kwon, 2012. "Individual and Aggregate Labor Supply in a Heterogeneous Agent Economy with Intensive and Extensive Margins," Working papers 2012rwp-48, Yonsei University, Yonsei Economics Research Institute.
    12. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    13. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
    14. Per Krusell & Toshihiko Mukoyama & Richard Rogerson & Ayşegül Şahin, 2010. "Aggregate labor market outcomes: The roles of choice and chance," Quantitative Economics, Econometric Society, vol. 1(1), pages 97-127, July.
    15. Isabel Correia, 2010. "Consumption Taxes and Redistribution," American Economic Review, American Economic Association, vol. 100(4), pages 1673-1694, September.
    16. Cho, Jang-Ok & Rogerson, Richard, 1988. "Family labor supply and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 233-245.
    17. Gunji, Hiroshi & Miyazaki, Kenji, 2011. "Estimates of average marginal tax rates on factor incomes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 81-106, June.
    18. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters, in: Paolo Onofri (ed.), The Economics of an Ageing Population, chapter 2, Edward Elgar Publishing.
    19. Alonso-Ortiz, Jorge & Rogerson, Richard, 2010. "Taxes, transfers and employment in an incomplete markets model," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 949-958, November.
    20. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    21. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Verdelin, Nicolaj, 2011. "Optimal tax and transfer programs for couples with extensive labor supply responses," Journal of Public Economics, Elsevier, vol. 95(11), pages 1485-1500.
    22. Nutahara, Kengo, 2015. "Laffer curves in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 36(C), pages 56-72.
    23. Jeremy Lise & Nao Sudo & Michio Suzuki & Ken Yamada & Tomoaki Yamada, 2014. "Wage, Income and Consumption Inequality in Japan, 1981-2008: from Boom to Lost Decades," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 582-612, October.
    24. ColemanII, Wilbur John, 2000. "Welfare and optimum dynamic taxation of consumption and income," Journal of Public Economics, Elsevier, vol. 76(1), pages 1-39, April.
    25. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    26. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1425-1458, September.
    27. Unknown, 1986. "Letters," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 1(4), pages 1-9.
    28. Fumio Hayashi & Edward C. Prescott, 2002. "The 1990s in Japan: A Lost Decade," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 206-235, January.
    29. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
    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. Nakajima, Tomoyuki & Takahashi, Shuhei, 2017. "The optimum quantity of debt for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 17-26.
    2. Tomoyuki Nakajima & Shuhei Takahashi, 2020. "On the Non-Existence of a Zero-Tax Steady State with Incomplete Asset Markets," KIER Working Papers 1025, Kyoto University, Institute of Economic Research.
    3. Nakajima, Tomoyuki & Takahashi, Shuhei, 2022. "Uninsured idiosyncratic risk and the government asset Laffer curve," Journal of Macroeconomics, Elsevier, vol. 71(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shuhei Takahashi & Tomoyuki Nakajima, 2016. "Consumption Taxes and Divisibility of Labor under Incomplete Markets," 2016 Meeting Papers 797, Society for Economic Dynamics.
    2. Shuhei Takahashi, 2020. "Time-Varying Wage Risk, Incomplete Markets, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 195-213, July.
    3. Nakajima, Tomoyuki & Takahashi, Shuhei, 2017. "The optimum quantity of debt for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 17-26.
    4. Minchul Yum, 2018. "On the distribution of wealth and employment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 86-105, October.
    5. Krusell, Per & Mukoyama, Toshihiko & Rogerson, Richard & Sahin, Aysegül, 2011. "A three state model of worker flows in general equilibrium," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1107-1133, May.
    6. Shuhei Takahashi & Ken Yamada, 2017. "The Impact of Taxes and Transfers on Skill Premium," KIER Working Papers 976, Kyoto University, Institute of Economic Research.
    7. Tiago Berriel & Rodrigo Abreu, 2015. "Long Term Debt and Credit Crisis in a Liquidity Constrained Economy," Textos para discussão 644, Department of Economics PUC-Rio (Brazil).
    8. Noh-Sun Kwark & Eunseong Ma, 2016. "Entrepreneurship and Income Distribution Dynamics: Why Are Top Income Earners Unaffected by Business Cycles?," Working Papers 1608, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    9. Marios Karabarbounis, 2012. "Heterogeneity in Labor Supply Elasticity and Optimal Taxation," 2012 Meeting Papers 655, Society for Economic Dynamics.
    10. Minchung Hsu & Tomoaki Yamada, 2019. "Population Aging, Health Care, and Fiscal Policy Reform: The Challenges for Japan," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(2), pages 547-577, April.
    11. Takahashi, Shuhei & Yamada, Ken, 2022. "Understanding international differences in the skill premium: The role of capital taxes and transfers," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    12. Andrés Erosa & Luisa Fuster & Gueorgui Kambourov, 2016. "Towards a Micro-Founded Theory of Aggregate Labour Supply," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(3), pages 1001-1039.
    13. Lopez-Daneri, Martin, 2016. "NIT picking: The macroeconomic effects of a Negative Income Tax," Journal of Economic Dynamics and Control, Elsevier, vol. 68(C), pages 1-16.
    14. Youngsoo Jang & Minchul Yum, 2022. "Nonlinear Occupations and Female Labor Supply Over Time," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 51-73, October.
    15. Jose Mustre-del-Rio, 2015. "Wealth and Labor Supply Heterogeneity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 619-634, July.
    16. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, 08.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

    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:wly:jmoncb:v:52:y:2020:i:2-3:p:505-530. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.