By supplementing income explicitly through payments or implicitly through taxes collected, income-based taxes and transfers make disposable income less variable. Because disposable income determines consumption, policies that smooth disposable income also create welfare improving consumption insurance. With data from the Panel Study of Income Dynamics we find that annual consumption variation is reduced by almost 20 percent due to explicit and implicit income smoothing. Consumption insurance is as important economically as private health or automobile insurance. Although taxes have become an increasingly important source of consumption insurance, the 2001 income-tax reform legislation should have little effect on implicit consumption insurance.
consumption, implicit insurance, income taxes, transfer payments, PSID
Working Papers Series
Economics | Public Affairs, Public Policy and Public Administration
Kniesner, Thomas J. and Ziliak, James P., "Explicit Versus Implicit Income" (2001). Center for Policy Research. 185.
Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.