CPR Working Paper Series No. 38

Explicit Versus Implicit Income Insurance

Thomas J. Kniesner and James P. Ziliak

October 2001
(Revised from July 2001)

Abstract:  By supplementing income explicitly through payments or implicitly through taxes collected, income-based taxes and transfers make disposable income less variable. Because disposable income determines consumption, policies that smooth disposable income also create welfare improving consumption insurance. With data from the Panel Study of Income Dynamics we find that annual consumption variation is reduced by almost 20 percent due to explicit and implicit income smoothing. Consumption insurance is as important economically as private health or automobile insurance. Although taxes have become an increasingly important source of consumption insurance, the 2001 income-tax reform legislation should have little effect on implicit consumption insurance.

 

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A revised version of this paper appears in The Journal of Risk and Uncertainty, 25(1) July(2002): 5-20.

http://www.kluweronline.com/issn/0895-5646/contents

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