Tax Reform and Automatic Stabilization

摘要

An income tax provides implicit insurance by dampening the variability o f dispos-s able income an consumption. Using an empirical framework derived from the consumption insurance literature an data form the Panel Study of Income Dynam- ics 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 0-TRA86 system is sizable for relatively risk-averse households facing large income risk but is much more modest for the typical household.