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Health Risk, Insurance and Optimal Progressive Income Taxation

Author

Listed:
  • Juergen Jung

    () (Department of Economics, Towson University)

  • Chung Tran

    () (Research School of Economics, The Australian National University)

Abstract

We study the optimal progressivity of personal income taxes in a general equilibrium overlapping generations model where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our results—based on a calibration to the US economy—indicate that the presence of health risk and health insurance has a strong effect on the optimal level of tax progressivity. Given the existing non-universal health insurance system in the US, the optimal income tax system is highly progressive in order to provide a sufficient amount of redistribution and social insurance to unhealthy low income individuals. The total welfare gain from optimizing the progressivity level is 5.6 percent in compensating lifetime consumption. The introduction of more comprehensive health insurance systems, such as Medicare for all, leads to large decreases in the optimal level of tax progressivity. When health expenditure risk is not modeled our framework exhibits an optimal income tax system similar to prior literature that abstracts from health risk. These findings highlight the importance of accounting for the unique characteristics of health and health insurance policies when designing optimal income taxes.

Suggested Citation

  • Juergen Jung & Chung Tran, 2017. "Health Risk, Insurance and Optimal Progressive Income Taxation," Working Papers 2017-01, Towson University, Department of Economics, revised Mar 2020.
    • Handle: RePEc:tow:wpaper:2017-01
    as

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    File URL: http://webapps.towson.edu/cbe/economics/workingpapers/2017-01.pdf
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    References listed on IDEAS

    as
    1. Capatina, Elena, 2015. "Life-cycle effects of health risk," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 67-88.
    2. Juergen Jung & Chung Tran, 2015. "Social Health Insurance: A Quantitative Exploration," ANU Working Papers in Economics and Econometrics 2015-629, Australian National University, College of Business and Economics, School of Economics.
    3. Mark Huggett & Juan Carlos Parra, 2010. "How Well Does the U.S. Social Insurance System Provide Social Insurance?," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 76-112, February.
    4. Ricardo Reis & Alisdair McKay, 2015. "Optimal Automatic Stabilizers," 2015 Meeting Papers 608, Society for Economic Dynamics.
    5. Yogo, Motohiro, 2016. "Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 17-34.
    6. Krueger, Dirk & Ludwig, Alexander, 2016. "On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 72-98.
    7. Kindermann, Fabian & Krueger, Dirk, 2014. "High marginal tax rates on the top 1%?," CFS Working Paper Series 473, Center for Financial Studies (CFS).
    8. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    9. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    10. Stefanie Stantcheva, 2017. "Optimal Taxation and Human Capital Policies over the Life Cycle," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 1931-1990.
    11. Dahlia K. Remler & Jason E. Rachlin & Sherry A. Glied, 2001. "What can the take-up of other programs teach us about how to improve take-up of health insurance programs?," NBER Working Papers 8185, National Bureau of Economic Research, Inc.
    12. Juergen Jung & Chung Tran, 2008. "The Macroeconomics of Health Savings Accounts," CAEPR Working Papers 2007-023, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    13. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 501-525, April.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Health Risk, Insurance and Optimal Progressive Income Taxation
      by Christian Zimmermann in NEP-DGE blog on 2019-10-10 19:15:25
    2. Optimal Progressive Income Taxation in a Bewley-Grossman Framework
      by Christian Zimmermann in NEP-DGE blog on 2017-04-15 01:55:36

    More about this item

    Keywords

    Health and income risks; Inequality; Social insurance; Tax progressivity; Suits index; Optimal taxation; General equilibrium.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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