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Evidence on the insurance effect of marginal income taxes

By Charles Grant, Christos Koulovatianos, Alexander Michaelides and Mario Padula

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

Topics: HJ Public Finance
Publisher: Centre for Economic Policy Research
Year: 2008
OAI identifier: oai:eprints.lse.ac.uk:5358
Provided by: LSE Research Online
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