Working Paper: NBER ID: w31755
Authors: Roger H. Gordon
Abstract: This paper rethinks the design of the income tax by assuming that the objective of the tax is not to redistribute from rich to poor but instead to provide some insurance to individuals against the uncertainties they face in their future earnings, a motivation for the tax proposed in Buchanan (1976). The income tax provides insurance by collecting money on net from individuals to the extent they end up doing well to finance net transfers to them when they end up doing badly. Individuals differ in the amount of future risks they face. These heterogeneous tastes for insurance provide a rationale for states to offer heterogeneous tax/transfer programs, each state attracting a different clientele in the population. Given the ease of household migration, state tax policies generate fiscal externalities to other states. The paper explores as well possible Federal interventions to improve on the equilibrium choices states make for their tax policies.
Keywords: No keywords provided
JEL Codes: H21; H24; H31; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income tax (H26) | insurance against income risks (G52) |
| state tax policies (H71) | migration patterns (F22) |
| migration patterns (F22) | efficiency of income tax systems (H21) |
| federal intervention (H77) | state tax policies (H71) |
| income tax (H26) | individual migration decisions (F22) |
| decentralized income tax policies (H29) | positive horizontal externalities (D62) |
| states with higher taxes (H71) | attract individuals with higher future risks (D91) |
| states with lower taxes (H71) | appeal to individuals with stable income prospects (G51) |