Insurance Effects of Tax-and-Transfer Progressivity

We compare the insurance effects of tax-and-transfer progressivity in the United States and Australia. Using household panel data and a semi-structural framework, we distinguish between a direct effect of progressivity on income risk and a dampening of this effect on consumption due to partial self-insurance. The more progressive system in Australia leads to a greater overall effect on consumption insurance against permanent income risk. Heterogeneity across households demonstrates how self-insurance mitigates the role of progressivity. A calibrated life-cycle model with non-homothetic preferences replicates the patterns in the data and implies progressivity reduces self-insurance, with transfers generating fewer distortions than taxes.