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Health Risk, Insurance and Optimal Progressive Income Taxation

Author

Listed:
  • Juergen Jung

    (Towson University)

  • Chung Tran

    (Australian National University)

Abstract
We study the optimal progressivity of personal income taxes in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our analysis is based on a large-scale overlapping generations general equilibrium model that is calibrated to the US economy. Our results indicate that the presence of health risk and health insurance has a strong effect on the amount of redistribution and social in- surance provided by progressive income taxes. In an environment with a non-universal health insurance system, such as the US system, the optimal income tax system is highly progressive in order to provide a sufficient level of redistribution to unhealthy low income individuals. The total welfare gain from optimizing the progressivity level is 5.6 percent in compensating lifetime consumption. More inclusive health insurance systems, such as Medicare for all, lead to large decreases in the optimal level of tax progressivity. When health expenditure risk is eliminated, the optimal income tax code becomes more similar to the findings of previous studies that used models without health risk. Our findings highlight the quantitative importance of accounting for the interdependence of health insurance and income taxes when designing optimal income tax policies.

Suggested Citation

  • Juergen Jung & Chung Tran, 2019. "Health Risk, Insurance and Optimal Progressive Income Taxation," 2019 Meeting Papers 620, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:620
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Health Risk, Insurance and Optimal Progressive Income Taxation
      by Christian Zimmermann in NEP-DGE blog on 2019-10-10 19:15:25
    2. Optimal Progressive Income Taxation in a Bewley-Grossman Framework
      by Christian Zimmermann in NEP-DGE blog on 2017-04-15 01:55:36

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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