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Risk Sharing and the Tax System

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Several papers have documented that US consumers can not fully insure themselves against all their idiosyncratic risks, but little is understood about which mechanisms provide insurance. We investigate whether, as some suggest, progressive taxes provide additional insurance. The methodology distinguishes insurance from redistribution, and can by applied to testing any potential insurance mechanism. Using repeated cross-sections from the US consumer expenditure survey (CEX), we relate changes in consumption inequality to several measures of tax progressivity. Identification exploits the variation in taxes both across states and over time. Our results suggest, under weak assumptions, that progressive taxes do not induce insurance, while stronger assumptions quantify this effect.

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  • Charles Grant & Mario Padula, 2001. "Risk Sharing and the Tax System," CSEF Working Papers 66, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:66
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