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The Insurance Value of State Tax-and-Transfer Programs

  • Hilary W. Hoynes
  • Erzo F.P. Luttmer

This paper estimates the total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the determinants of changes in the value of state net benefits over a more than 30-year period. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value of transfers is increasing in income. The resulting total value still declines with income, but not nearly as sharply as the redistributive value. Hence, the insurance value mitigates the incentives for mobility that would "undo" state redistributive spending.

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File URL: http://www.nber.org/papers/w16280.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16280.

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Date of creation: Aug 2010
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:16280
Note: PE
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  1. Hilary W. Hoynes & Erzo F.P. Luttmer, 2010. "The Insurance Value of State Tax-and-Transfer Programs," NBER Working Papers 16280, National Bureau of Economic Research, Inc.
  2. Rebecca M. Blank, 2000. "What Causes Public Assistance Caseloads to Grow?," JCPR Working Papers 18, Northwestern University/University of Chicago Joint Center for Poverty Research.
  3. John Kennan & James R. Walker, 2003. "The Effect of Expected Income on Individual Migration Decisions," NBER Working Papers 9585, National Bureau of Economic Research, Inc.
  4. Bénabou, Roland & Ok, Efe A, 1998. "Social Mobility and the Demand for Redistribution: the POUM Hypothesis," CEPR Discussion Papers 1955, C.E.P.R. Discussion Papers.
  5. Paul W. Rhode & Koleman S. Strumpf, 2003. "Assessing the Importance of Tiebout Sorting: Local Heterogeneity from 1850 to 1990," American Economic Review, American Economic Association, vol. 93(5), pages 1648-1677, December.
  6. Cochrane, John H, 1995. "Time-Consistent Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 445-73, June.
  7. Baicker, Katherine & Clemens, Jeffrey & Singhal, Monica, 2012. "The rise of the states: U.S. fiscal decentralization in the postwar period," Journal of Public Economics, Elsevier, vol. 96(11), pages 1079-1091.
  8. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2006. "Evidence on the Insurance Effect of Redistributive Taxation," Vienna Economics Papers 0611, University of Vienna, Department of Economics.
  9. Gruber, Jonathan, 2000. "Cash welfare as a consumption smoothing mechanism for divorced mothers," Journal of Public Economics, Elsevier, vol. 75(2), pages 157-182, February.
  10. Buchanan, James M., 1976. "Taxation in fiscal exchange," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 17-29.
  11. Martin Feldstein & Marian Vaillant, 1994. "Can State Taxes Redistribute Income?," NBER Working Papers 4785, National Bureau of Economic Research, Inc.
  12. Raj Chetty & Adam Szeidl, 2006. "Consumption Commitments and Risk Preferences," NBER Working Papers 12467, National Bureau of Economic Research, Inc.
  13. Bruce D. Meyer & Wallace K. C. Mok & James X. Sullivan, 2009. "The Under-Reporting of Transfers in Household Surveys: Its Nature and Consequences," Working Papers 0903, Harris School of Public Policy Studies, University of Chicago.
  14. Jeffrey R. Brown, 2003. "Redistribution and Insurance: Mandatory Annuitization With Mortality Heterogeneity," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 17-41.
  15. Robin Boadway & Jean-François Tremblay, 2010. "Reassessment of the Tiebout Model," NBER Chapters, in: Fiscal Federalism, pages 1063-1078 National Bureau of Economic Research, Inc.
  16. Robert A. Moffitt, 2003. "Means-Tested Transfer Programs in the United States," NBER Books, National Bureau of Economic Research, Inc, number moff03-1, August.
  17. repec:ucp:bknber:9780226533568 is not listed on IDEAS
  18. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  19. Roger H. Gordon & Julie Berry Cullen, 2010. "Income Redistribution in a Federal System of Governments," NBER Chapters, in: Fiscal Federalism, pages 1100-1109 National Bureau of Economic Research, Inc.
  20. Jon Bakija, 2006. "Documentation for a Comprehensive Historical U.S. Federal and State Income Tax Calculator Program," Department of Economics Working Papers 2006-02, Department of Economics, Williams College, revised Aug 2009.
  21. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  22. Robert A. Moffitt, 2003. "Introduction to "Means-Tested Transfer Programs in the United States"," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 1-14 National Bureau of Economic Research, Inc.
  23. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  24. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
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