Social Insurance, Incentives, and Risk Taking

Hans-Werner Sinn

No 5335, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: From the perspective of parents, redistributive taxation can be seen as social insurance for their children, for which no private alternative exists. Because private insurance comes too late during a person's life, it cannot cover the same risks as social insurance. Empirically, 85% of social insurance covers risks for which no private insurance would have been available. Redistributive taxation can be efficiency enhancing, because it creates safety and because it stimulates income generating risk taking. However, it also brings about detrimental moral hazard effects. Both the enhancement of risk taking and the moral hazard effects tend to increase the inequality in the economy, and, under constant returns to risk taking, this increase is likely to be strong enough even to make the net-of-tax income distribution more unequal. Optimal redistributive taxation will either imply that the pie becomes bigger when there is less inequality in pre-tax incomes or that more redistribution creates more post-tax inequality. The welfare state will encounter severe risks when free migration of people, goods, and factors of production becomes possible. Basing redistributive taxation on a nationality principle may help overcome some of these risks.

JEL-codes: H2 (search for similar items in EconPapers)
Date: 1995-11
Note: PE
References: View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Published as International Tax and Public Finance 3, (1996), pp. 259-280.

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Related works:
Journal Article: Social insurance, incentives and risk taking (1996)
Working Paper: Social Insurance, Incentives and Risk Taking (1996)
Working Paper: Social Insurance, Incentives and Risk Taking (1996)
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