Working Paper: NBER ID: w16280
Authors: Hilary W. Hoynes; Erzo FP Luttmer
Abstract: This paper estimates the total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the determinants of changes in the value of state net benefits over a more than 30-year period. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value of transfers is increasing in income. The resulting total value still declines with income, but not nearly as sharply as the redistributive value. Hence, the insurance value mitigates the incentives for mobility that would "undo" state redistributive spending.
Keywords: state tax-and-transfer programs; redistributive value; insurance value; income shocks
JEL Codes: H2; H75
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| redistributive value of state tax-and-transfer programs (H23) | total value derived from state tax-and-transfer programs (H79) |
| insurance value of state tax-and-transfer programs (H53) | total value derived from state tax-and-transfer programs (H79) |
| changes in income and family composition (D19) | total value derived from state tax-and-transfer programs (H79) |
| income (E25) | redistributive value of state tax-and-transfer programs (H23) |
| income (E25) | insurance value of state tax-and-transfer programs (H53) |