Insurance Effects of Tax-and-Transfer Progressivity

Yunho Cho, James Morley and Aarti Singh

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We compare the insurance effects of tax-and-transfer progressivity in the United States and Australia. Using household panel data and a semi-structural framework, we distinguish between a direct effect of progressivity on income risk and a dampening of this effect on consumption due to partial self-insurance. The more progressive system in Australia leads to a greater overall effect on consumption insurance against permanent income risk. Heterogeneity across households demonstrates how self-insurance mitigates the role of progressivity. A calibrated life-cycle model with non-homothetic preferences replicates the patterns in the data and implies progressivity reduces self-insurance, with transfers generating fewer distortions than taxes.

Keywords: progressive income taxes; redistributive transfers; permanent income risk; consumption insurance; incomplete markets; non-homothetic preferences (search for similar items in EconPapers)
JEL-codes: C13 C33 D12 D14 D15 E21 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2024-08, Revised 2025-10
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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https://crawford.anu.edu.au/sites/default/files/20 ... sed%20Oct%202025.pdf Revised Version (application/pdf)
https://crawford.anu.edu.au/sites/default/files/20 ... nal%20Aug%202024.pdf Original Version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2024-52

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