Evidence on the insurance effect of marginal income taxes

Charles Grant, Christos Koulovatianos, Alexander Michaelides and Mario Padula

No 2008/06, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: Marginal income taxes may have an insurance effect by decreasing the effective fluctuations of after-tax individual income. By compressing the idiosyncratic component o personal income fluctuations, higher marginal taxes should be negatively correlated with the dispersion of consumption across households, a necessary implication of an insurance effect of taxation. Our study empirically examines this negative correlation, exploiting the ample variation of state taxes across US states. We show that taxes are negatively correlated with the consumption dispersion of the within-state distribution of non-durable consumption and that this correlation is robust.

Keywords: Undiversifiable Earnings Risk; Consumption Insurance; Tax Distortions (search for similar items in EconPapers)
JEL-codes: E21 H20 H31 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Evidence on the Insurance Effect of Marginal Income Taxes (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200806

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