Evidence on the Insurance Effect of Marginal Income Taxes

Alexander Michaelides, Charles Grant, Mario Padula and Christos Koulovatianos

No 6710, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Marginal income taxes may have an insurance effect by decreasing the effective fluctuations of after-tax individual income. By compressing the idiosyncratic component of 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: Consumption insurance; Tax distortions; Undiversifiable earnings risk (search for similar items in EconPapers)
JEL-codes: E21 H20 H31 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-ias, nep-mac and nep-pub
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Citations: View citations in EconPapers (1)

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Working Paper: Evidence on the insurance effect of marginal income taxes (2008)
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