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Evidence on the Insurance Effect of Redistributive Taxation

  • 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)

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.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0809.pdf
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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0809.

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Date of creation: 2008
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Handle: RePEc:exe:wpaper:0809
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