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Insurance Effects of Tax-and-Transfer Progressivity

Author

Listed:
  • Yunho Cho
  • James Morley
  • Aarti Singh

Abstract

We compare the insurance effects of tax-and-transfer progressivity in the United States and Australia. Using household panel data and a semi-structural framework, we distinguish between a direct effect of progressivity on income risk and a dampening of this effect on consumption due to partial self-insurance. The more progressive system in Australia leads to a greater overall effect on consumption insurance against permanent income risk. Heterogeneity across households demonstrates how self-insurance mitigates the role of progressivity. A calibrated life-cycle model with non-homothetic preferences replicates the patterns in the data and implies progressivity reduces self-insurance, with transfers generating fewer distortions than taxes.

Suggested Citation

  • Yunho Cho & James Morley & Aarti Singh, 2024. "Insurance Effects of Tax-and-Transfer Progressivity," CAMA Working Papers 2024-52, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University, revised Oct 2025.
    • Handle: RePEc:een:camaaa:2024-52
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-10/52_2024_Cho_Morley_Singh_Revised%20Oct%202025.pdf
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-10/52a_2024_Cho_Morley_Singh_Original%20Aug%202024.pdf
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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