IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/5335.html
   My bibliography  Save this paper

Social Insurance, Incentives, and Risk Taking

Author

Listed:
  • Hans-Werner Sinn

Abstract

From the perspective of parents, redistributive taxation can be seen as social insurance for their children, for which no private alternative exists. Because private insurance comes too late during a person's life, it cannot cover the same risks as social insurance. Empirically, 85% of social insurance covers risks for which no private insurance would have been available. Redistributive taxation can be efficiency enhancing, because it creates safety and because it stimulates income generating risk taking. However, it also brings about detrimental moral hazard effects. Both the enhancement of risk taking and the moral hazard effects tend to increase the inequality in the economy, and, under constant returns to risk taking, this increase is likely to be strong enough even to make the net-of-tax income distribution more unequal. Optimal redistributive taxation will either imply that the pie becomes bigger when there is less inequality in pre-tax incomes or that more redistribution creates more post-tax inequality. The welfare state will encounter severe risks when free migration of people, goods, and factors of production becomes possible. Basing redistributive taxation on a nationality principle may help overcome some of these risks.

Suggested Citation

  • Hans-Werner Sinn, 1995. "Social Insurance, Incentives, and Risk Taking," NBER Working Papers 5335, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5335
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w5335.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
    2. Hans-Werner Sinn, 1994. "A Theory of the Welfare State," CESifo Working Paper Series 65, CESifo.
    3. Louis Kaplow, 1991. "A Note on Taxation as Social Insurance for Uncertain Labor Income," NBER Working Papers 3708, National Bureau of Economic Research, Inc.
    4. Kai A. Konrad, 1991. "Risk Taking and Taxation in Complete Capital Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 16(2), pages 167-177, December.
    5. Kanbur, S M, 1979. "Of Risk Taking and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 769-797, August.
    6. Ahsan, Syed M., 1976. "Taxation in a two-period temporal model of consumption and portfolio allocation," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 337-352.
    7. Christiansen, Vidar, 1990. "Subsidization Of Risky Investment Under Income Taxation And Moral Hazard," Economic Research Papers 268392, University of Warwick - Department of Economics.
    8. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    9. Sinn, Hans-Werner, 1995. " A Theory of the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 495-526, December.
    10. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434-434.
    11. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
    12. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 1-27.
    13. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
    14. Barr, Nicholas, 1992. "Economic Theory and the Welfare State: A Survey and Interpretation," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 741-803, June.
    15. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
    16. Boadway, Robin W & Wildasin, David E, 1990. "Optimal Tax-Subsidy Policies for Industrial Adjustment to Uncertain Shocks," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 105-134, January.
    17. Mirrlees, J. A., 1995. "Private risk and public action: The economics of the welfare state," European Economic Review, Elsevier, vol. 39(3-4), pages 383-397, April.
    18. Kaplow, Louis, 1992. "Income Tax Deductions for Losses as Insurance," American Economic Review, American Economic Association, vol. 82(4), pages 1013-1017, September.
    19. Vidar Christiansen, 1990. "Subsidization Of Risky Investment Under Income Taxation And Moral Hazard," The Warwick Economics Research Paper Series (TWERPS) 357, University of Warwick, Department of Economics.
    20. Sinn, Hans-Werner, 1986. "Risiko als Produktionsfaktor," Munich Reprints in Economics 19879, University of Munich, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    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. Feduzi, Alberto & Runde, Jochen, 2011. "The uncertain foundations of the welfare state," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 613-627.
    2. Wolfgang Buchholz & Kai A. Konrad, 2014. "Taxes on risky returns — an update," Working Papers tax-mpg-rps-2014-10, Max Planck Institute for Tax Law and Public Finance.
    3. Louis Kaplow, 1991. "A Note on Taxation as Social Insurance for Uncertain Labor Income," NBER Working Papers 3708, National Bureau of Economic Research, Inc.
    4. Weinreich, Daniel, 2013. "The perception of distributive fairness and optimal taxation under uncertainty," MPRA Paper 48912, University Library of Munich, Germany.
    5. Alesina, Alberto & La Ferrara, Eliana, 2005. "Preferences for redistribution in the land of opportunities," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 897-931, June.
    6. Andersen, Torben M., 2004. "Challenges to the Scandinavian welfare model," European Journal of Political Economy, Elsevier, vol. 20(3), pages 743-754, September.
    7. DREZE, Jacques, 2000. "Economic and social security in the twenty-first century, with attention to Europe," LIDAM Discussion Papers CORE 2000015, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Boarini, Romina & Le Clainche, Christine, 2009. "Social preferences for public intervention: An empirical investigation based on French data," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(1), pages 115-128, January.
    9. Dreze, Jacques H, 2000. " Economic and Social Security in the Twenty-First Century, with Attention to Europe," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 327-348, June.
    10. Frederick Van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo.
    11. Jakee, Keith & Sun, Guang-Zhen, 2005. "External habit formation and dependency in the welfare state," European Journal of Political Economy, Elsevier, vol. 21(1), pages 83-98, March.
    12. Thomas Eichner & Andreas Wagener, 2002. "Increases in Risk and the Welfare State," CESifo Working Paper Series 685, CESifo.
    13. Didier Blanchet, 1996. "La référence assurantielle en matière de protection sociale : apports et limites," Économie et Statistique, Programme National Persée, vol. 291(1), pages 33-45.
    14. Konrad, Kai A., 1999. "Privacy, time consistent optimal labor income taxation and education policy," IZA Discussion Papers 82, Institute of Labor Economics (IZA).
    15. Matti Tuomala & Hannu Tanninen, 2005. "Inherent Inequality and the Extent of Redistribution in OECD Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(01), pages 48-53, April.
    16. Niko Gobbin & Glenn Rayp, 2008. "Different ways of looking at old issues: a time-series approach to inequality and growth," Applied Economics, Taylor & Francis Journals, vol. 40(7), pages 885-895.
    17. Blomquist, Soren & Christiansen, Vidar, 1999. "The political economy of publicly provided private goods," Journal of Public Economics, Elsevier, vol. 73(1), pages 31-54, July.
    18. Niehues, Judith, 2010. "Social Spending Generosity and Income Inequality: A Dynamic Panel Approach," IZA Discussion Papers 5178, Institute of Labor Economics (IZA).
    19. Heblich, Stephan, 2007. "Eigenverantwortliche Individuen und Pro-Aktive Unternehmen," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-48-07, University of Passau, Faculty of Business and Economics.
    20. Pekka Ilmakunnas & Vesa Kanniainen & Uki Lammi, "undated". "Entrepreneurship, Economic Risks, and Risk-Insurance in the Welfare State," EPRU Working Paper Series 99-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

    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:nbr:nberwo:5335. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    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: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.