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Evidence on the insurance effect of marginal income taxes

Grant, Charles and Koulovatianos, Christos and Michaelides, Alexander and Padula, Mario (2008) Evidence on the insurance effect of marginal income taxes. 6710. Centre for Economic Policy Research, London, UK.

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Identification Number: 6710

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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2008 Charles Grant, Christos Koulovatianos, Alexander Michaelides and Mario Padula
Subjects: H Social Sciences > HJ Public Finance
JEL classification: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 04 Jun 2008 15:43
Last Modified: 27 Feb 2014 15:35
URI: http://eprints.lse.ac.uk/id/eprint/5358

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