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Health Risk, Insurance and Optimal Progressive Income Taxation

Juergen Jung and Chung Tran

No 620, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study the optimal progressivity of personal income taxes in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our analysis is based on a large-scale overlapping generations general equilibrium model that is calibrated to the US economy. Our results indicate that the presence of health risk and health insurance has a strong effect on the amount of redistribution and social in- surance provided by progressive income taxes. In an environment with a non-universal health insurance system, such as the US system, the optimal income tax system is highly progressive in order to provide a sufficient level of redistribution to unhealthy low income individuals. The total welfare gain from optimizing the progressivity level is 5.6 percent in compensating lifetime consumption. More inclusive health insurance systems, such as Medicare for all, lead to large decreases in the optimal level of tax progressivity. When health expenditure risk is eliminated, the optimal income tax code becomes more similar to the findings of previous studies that used models without health risk. Our findings highlight the quantitative importance of accounting for the interdependence of health insurance and income taxes when designing optimal income tax policies.

Date: 2019
New Economics Papers: this item is included in nep-dge, nep-hea, nep-ias, nep-pbe and nep-pub
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Related works:
Journal Article: Health Risk, Insurance, and Optimal Progressive Income Taxation (2023) Downloads
Working Paper: Health Risk, Insurance and Optimal Progressive Income Taxation (2022) Downloads
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