Explicit Versus Implicit Income Insurance

The Journal of Risk and Uncertainty, Vol. 25, No. 1, pp. 5-20, July 2002

Posted: 16 Apr 2011

See all articles by Thomas J. Kniesner

Thomas J. Kniesner

Claremont Graduate University - Department of Economic Sciences; Syracuse University - Department of Economics; IZA

James P. Ziliak

University of Kentucky - Department of Economics

Date Written: October 1, 2001

Abstract

By supplementing income explicitly through payments or implicitly through taxes collected, income-based taxes and transfers make disposable income less variable. Because disposable income determines consumption, policies that smooth disposable income also create welfare improving consumption insurance. With data from the Panel Study of Income Dynamics we find that annual consumption variation is reduced by almost 20 percent due to explicit and implicit income smoothing. Consumption insurance is as important economically as private health or automobile insurance. Although taxes have become an increasingly important source of consumption insurance, the 2001 income-tax reform legislation should have little effect on implicit consumption insurance.

Suggested Citation

Kniesner, Thomas J. and Ziliak, James P., Explicit Versus Implicit Income Insurance (October 1, 2001). The Journal of Risk and Uncertainty, Vol. 25, No. 1, pp. 5-20, July 2002, Available at SSRN: https://ssrn.com/abstract=1809070

Thomas J. Kniesner (Contact Author)

Claremont Graduate University - Department of Economic Sciences ( email )

Claremont, CA 91711
United States

Syracuse University - Department of Economics ( email )

Syracuse, NY 13244-1020
United States

IZA

P.O. Box 7240
Bonn, D-53072
Germany

James P. Ziliak

University of Kentucky - Department of Economics ( email )

Lexington, KY 40506
United States

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