Income tax deductions for losses as insurance revisited

T.C. Michael Wu and C.C. Yang

Economic Modelling, 2014, vol. 41, issue C, 274-280

Abstract: Kaplow (1992) shows that allowing income tax deductions for losses as partial insurance is undesirable in the presence of private insurance markets. This paper revisits the issue by considering a model that integrates Kaplow (1992) with Stiglitz (1982). We address the following question: Whether the income tax deduction for losses is part of an optimal income tax system. We show that introducing the income tax deduction for uninsured losses to complement an optimal nonlinear labor income tax will Pareto-improve welfare, provided that: (i) information is incomplete for the government as in the Stiglitz framework, and (ii) the premium for private insurance is unfair or moral hazard is present.

Keywords: Income tax deductions for losses; Private insurance; Optimal income tax (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:41:y:2014:i:c:p:274-280

DOI: 10.1016/j.econmod.2014.05.009

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