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American Economic Review: Vol. 92 No. 3 (June 2002)
AER Volume. 92, Issue 3 | 
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Tax Reform and Automatic Stabilization
Article Citation
Kniesner, Thomas J., and
James P. Ziliak. 2002. "Tax Reform and Automatic Stabilization ."
The American Economic Review,
92(3): 590-612.
DOI: 10.1257/00028280260136264
DOI: 10.1257/00028280260136264
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)
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Authors
Kniesner, Thomas J. (Center for Policy Research, 426 Eggers Hall, Syracuse University, Syracuse, NY 13244)
Ziliak, James P. (Department of Economics, 1285 University of Oregon, Eugene, OR 97403)
Ziliak, James P. (Department of Economics, 1285 University of Oregon, Eugene, OR 97403)
