Essays on Household Health and Taxation

Abstract

This dissertation consists of three chapters. The first chapter aims to answer the following questions: how does health affect one's preferences and ability to self-insure? How does it impact one's valuation of government insurance? To answer these questions, I build a life-cycle model in which health affects not only survival, earnings, and medical expenses but also, and importantly, the marginal utility of consumption. While there is previous evidence showing that the effect of health on preferences is important, the literature has not reached a consensus on its size or direction. I calibrate my model using health, consumption, and income data from the Panel Study of Income Dynamics. I find that bad health reduces the marginal utility of (non-medical) consumption and that this effect lowers savings over the life cycle and decreases consumption in old age. I also show that a model without health-dependent preferences does not replicate the degree of self-insurance against health shocks observed in the data. Finally, I find that health-dependent preferences reduce the household valuation of means-tested government insurance programs in the United States. The second chapter is joint work with Margherita Borella, Mariacristina De Nardi, Michael Pak, and Fang Yang. This chapter focuses on federal income taxes in the United States. My co-authors and I start with the observation that the structure of taxes and their burden have undergone large and frequent changes over time. We calculate effective federal income tax rates for each wave of the Panel Study of Income Dynamics and discuss how effective taxation changed from 1969 to 2016. We show that most tax regimes are short-lived and that the variation in taxes over time and across groups is large. We also use an estimated dynamic model of couples and singles to show that the various tax regimes that we estimate imply very different labor market and saving behavior. We conclude that it is important to study and model tax changes over time and across groups. The third chapter is joint work with Xincheng Qiu. This chapter studies income tax systems across countries using micro-data from the Luxembourg Income Study. This chapter shows that income tax systems worldwide are approximated remarkably well by a two-parameter log-linear effective tax function. We estimate country-and-year-specific effective tax functions to compare average taxation and income tax progressivity across countries and over time. Our results provide several insights into the nature of income tax systems. First, we report a positive association between a higher average level of taxation and greater progressivity. Second, we show that progressivity has significantly changed over the last forty years in all countries we study. Third, we discover a positive association between progressivity and economic development, with wealthier countries exhibiting higher income tax progressivity. Finally, we observe variations in progressivity across different family structures, with married couples with children experiencing the highest progressivity and childless singles facing the lowest.