Evidence on the Insurance Effect of Redistributive Taxation

Charles Grant; Christos Koulovatianos; Alexander Michaelides; Mario Padula

doi:10.1162/rest_a_00040

Evidence on the Insurance Effect of Redistributive Taxation

Charles Grant¹; Christos Koulovatianos²; Alexander Michaelides³; Mario Padula⁴

¹ University of Reading · ² University of Nottingham · ³ Center for Economic and Policy Research · ⁴ Ca' Foscari University of Venice

The Review of Economics and Statistics 2010 open access

If households face uninsurable idiosyncratic earnings risk, theory predicts that redistributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across U.S. states and over time, we investigate the necessary traces of these two effects in the data: that state-level measures of redistributive taxation should correlate negatively with the standard deviation and the mean of the within-state consumption distribution. We find that the first correlation is robust, supporting strongly the presence of an insurance effect. The distortionary effect can also be detected in the data, but it is less precisely estimated.

DOI: 10.1162/rest_a_00040
Volume: 92 (4)
Pages: 965-973
Language: en
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