A NOTE ON TAXATION AS SOCIAL INSURANCE FOR UNCERTAIN LABOR INCOME

Various authors have proposed that income taxation may be justified to some extent on the ground that it serves as social insurance against uncertainties in labor income. They assume that private insurance is unavailable, primarily because of moral hazard, and demonstrate that some taxation is efficient because the benefits of mitigating risk exceed incentive costs. This note suggests that private insurance should be considered explicitly in examining this question. Moral hazard problems limiting private insurance coverage are not alleviated by government insurance. Moreover in the presence of mel-al hazard, government insurance, through labor income taxation or otherwise, may be an inefficient policy because private insurance decisions are distorted. The case for using the income tax to provide insurance is, therefore, more complex than generally contemplated and such use of the income tax tends to involve an efficiency cost that itself might be a subject of government policy.