Health Risk, Insurance and Optimal Progressive Income Taxation

Juergen Jung and Chung Tran

No 2017-01, Working Papers from Towson University, Department of Economics

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 labor productivity and health status over the lifecycle. Our results—based on a calibration to the US economy—indicate that both, the presence of health risk and the available insurance institutions have a strong effect on the optimal level of tax progressivity. Given the fragmented and non-universal health insurance system in the US, a welfare maximizing income tax system is substantially more progressive than the current US income tax. The higher progressivity provides additional redistribution and social insurance, especially for unhealthy low income individuals who have limited access to health insurance. When exposure to health risk is removed or reduced by introducing more comprehensive health insurance systems, we observe large decreases in the optimal level of income tax progressivity and the optimal tax system resembles findings from the previous literature. These findings highlight the importance of accounting for the unique characteristics of health risk and the design of the health insurance system when characterizing optimal income taxes.

Keywords: Health and income risks; Inequality; Social insurance; Tax progressivity; Suits index; Optimal taxation; General equilibrium. (search for similar items in EconPapers)
JEL-codes: E62 H24 I13 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2017-03, Revised 2022-11
New Economics Papers: this item is included in nep-dge, nep-hea, nep-ias, nep-mac, nep-pbe and nep-pub
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http://webapps.towson.edu/cbe/economics/workingpapers/2017-01.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: Health Risk, Insurance, and Optimal Progressive Income Taxation (2023)
Working Paper: Health Risk, Insurance and Optimal Progressive Income Taxation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tow:wpaper:2017-01

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