Tax Reform and Automatic Stabilization

Authors: Kniesner T.J.¹; Ziliak J.P.²

Source: The American Economic Review, Volume 92, Number 3, 1 June 2002 , pp. 590-612(23)

Publisher: American Economic Association

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Abstract:

An income tax provides implicit insurance by dampening the variability of disposable income and consumption. Using an empirical framework derived from the consumption insurance literature and data from the Panel Study of Income Dynamics we examine the effect of federal income tax reforms of the 1980's on automatic stabilization of consumption. Overall, ERTA and TRA86 reduced consumption stability by about 50 percent. Recently increased EITC generosity restored or enhanced consumption insurance. The welfare cost of moving to the post-TRA86 system is sizable for relatively risk-averse households facing large income risk but is much more modest for the typical household. (JEL H21)

Language: English

Document Type: Research article

Affiliations: 1: Center for Policy Research, 426 Eggers Hall, Syracuse University, Syracuse, NY 13244 2: Department of Economics, 1285 University of Oregon, Eugene, OR 97403

Publication date: 2002-06-01

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The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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