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Evidence on the Insurance Effect of Redistributive Taxation

Author

Listed:
  • Charles Grant

    (University of Reading)

  • Christos Koulovatianos

    (Department of Economics, University of Exeter and CFS)

  • Alexander Michaelides

    (London School of Economics and CEPR)

  • Mario Padula

    (University \Ca' Foscari" of Venice and CSEF)

Abstract

If households face uninsurable idiosyncratic earnings risk, theory predicts that redistributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across US states 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.

Suggested Citation

  • Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2008. "Evidence on the Insurance Effect of Redistributive Taxation," Discussion Papers 0809, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0809
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0809.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Carolina Achury & Sylwia Hubar & Christos Koulovatianos, 2012. "Saving Rates and Portfolio Choice with Subsistence Consumption," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 108-126, January.
    2. repec:bpj:bejmac:v:18:y:2018:i:1:p:19:n:2 is not listed on IDEAS
    3. 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.
    4. Carolina Achury & Sylwia Hubar & Christos Koulovatianos, 2012. "Saving Rates and Portfolio Choice with Subsistence Consumption," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 108-126, January.
    5. Heer Burkhard, 2018. "Optimal pensions in aging economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-19, January.
    6. 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.

    More about this item

    Keywords

    Undiversi¯able Earnings Risk; Consumption Insurance; Tax Distortions;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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