Abstract

  


 



Evidence on the Insurance Effect of Marginal Income Taxes


Charles Grant


University of Reading

Christos Koulovatianos


University of Vienna - Department of Economics

Alexander Michaelides


University of Cyprus - Department of Public and Business Administration; Centre for Economic Policy Research (CEPR)

Mario Padula


University "Ca' Foscari" of Venice; CSEF
February 1, 2008

CFS Working Paper No. 2008/06

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: Undiversifiable Earnings Risk, Consumption Insurance, Tax Distortions

JEL Classification: E21, H20, H31

working papers series


Date posted: September 25, 2008  

Suggested Citation

Grant, Charles, Koulovatianos, Christos, Michaelides, Alexander and Padula, Mario, Evidence on the Insurance Effect of Marginal Income Taxes (February 1, 2008). CFS Working Paper No. 2008/06. Available at SSRN: http://ssrn.com/abstract=1273558

Contact Information

Charles Grant
University of Reading ( email )
Whiteknights
Reading, RG6 6AH
United Kingdom
Christos Koulovatianos (Contact Author)
University of Vienna - Department of Economics ( email )
Bruennerstrasse 72
Vienna, A-1210
Austria
+43 1 4277 37401 (Phone)
+43 1 4277 9374 (Fax)
HOME PAGE: http://homepage.univie.ac.at/christos.koulovatianos/
Alexander Michaelides
University of Cyprus - Department of Public and Business Administration ( email )
75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Mario Padula
University "Ca' Foscari" of Venice ( email )
S. Giobbe 873
Venice, 30121
Italy
+390412349181 (Phone)
+390412349176 (Fax)
CSEF
Via Don Melillo I
Fisciano, Salerno, 84084
Italy
Feedback to SSRN (Beta)


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