nep-pub New Economics Papers
on Public Finance
Issue of 2005‒07‒18
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On the Optimal Progressivity of the Income Tax Code By Juan Carlos Conesa; Dirk Krueger
  2. Pareto Improving Social Security Reform when Financial Markets are Incomplete!? By Dirk Krueger; Felix Kubler
  3. Redistribution, horizontal inequity and reranking: how to measure them properly By Ivica Urban; Peter J. Lambert
  4. Refundable Tax Credits for Health Insurance: The Sensitivity of Simulated Impacts to Assumed Behavior By David W. Emmons; Eva Madly; Stephen A. Woodbury

  1. By: Juan Carlos Conesa (Universitat Pompeu Fabra, CREA and CREB-UB); Dirk Krueger (Department of Business and Economics, Johann Wolfgang Goethe-University Frankfurt am Main, Mertonstr. 17, PF 81, 60054 Frankfurt am Main, Germany; and CFS, CEPR and NBER)
    Abstract: This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17:2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1:7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.
    Keywords: Progressive Taxation, Optimal Taxation, Flat Taxes, Social Insurance, Transition
    JEL: E62 H21 H24
    Date: 2005–01–10
  2. By: Dirk Krueger (University of Frankfurt); Felix Kubler (University of Mannheim)
    Abstract: This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically effcient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.
    Keywords: Social Security Reform, Aggregate Fluctuations, Intergenerational Risk Sharing, Incomplete Markets.
    JEL: E62 H55 H31 D91 D58
    Date: 2005–01–12
  3. By: Ivica Urban (Institute of Public Finance, Zagreb, Croatia); Peter J. Lambert (University of Oregon Economics Department)
    Abstract: The decomposition of the redistributive effect of an income tax into vertical, horizontal and reranking contributions according to the model of Aronson, Johnson and Lambert (1994), henceforth AJL, is revisited. When close equals groups are used, rather than the exact equals groups upon which the model is predicated, problems arise. A new measurement system is proposed, in which three distinct forms of reranking are disentangled and the vertical and horizontal contributions are redefined. Other approaches to measuring equity in tax systems are set in context. Findings are applied to Croatian data, and recommendations for users of the AJL methodology are given.
    Keywords: redistributive effect, vertical equity, horizontal inequity, reranking
    JEL: H23
    Date: 2005–07–01
  4. By: David W. Emmons (American Medical Association); Eva Madly (W.E. Upjohn Institute); Stephen A. Woodbury (W.E. Upjohn Institute and Michigan State University)
    Abstract: We replicate and extend a simulation model developed by Jonathan Gruber with the goals of illuminating Gruber's modeling of health insurance coverage under a tax credit and examining the sensitivity of the results to changes in the model's key parameters. The replications suggest that a refundable tax credit of $1,000 for a single individual or $2,000 for a family for private health insurance would reduce the number of uninsured individuals by between 17.5 and 28 percent and require new government expenditures of between $16.6 and $44 billion, of which about $7.4 - $9.7 billion would be for coverage of previously uninsured individuals. These wide simulated ranges highlight the uncertainty inherent in modeling the effects of health insurance tax credits and suggest that progress on the issue of tax credits for health insurance will require improved evidence on the likely take-up rate of a credit.Keywords: Sullivan, TANF, eligibility, vehicle, asset limits
    Keywords: health, insurance, Gruber, tax, credit, Woodbury, Emmons, Upjohn
    JEL: I18 H23
    Date: 2005–07

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