Income tax deductions for losses as insurance revisited ¬リニ

a r t i c l e i n f o Keywords: Income tax deductions for losses Private insurance Optimal income tax Kaplow (1992) shows that allowing income tax deductions for losses as partial insurance is undesirable in the presence of private insurance markets. This paper revisits the issue by considering a model that integrates Kaplow (1992) with Stiglitz (1982). We address the following question: Whether the income tax deduction for losses is part of an optimal income tax system. We show that introducing the income tax deduction for unin-sured losses to complement an optimal nonlinear labor income tax will Pareto-improve welfare, provided that: (i) information is incomplete for the government as in the Stiglitz framework, and (ii) the premium for private insurance is unfair or moral hazard is present. In a seminal paper, Mirrlees (1971) addresses the design of income taxation in which individual ability (type) is not directly observable by the government. The Mirrlees model contains continuum types. Stiglitz (1982) explicitly formulates the problem as one of self-selection and focuses on the case of two types (low-and high-ability individuals). Perhaps due to its simplicity and intuitive appeal, the Stiglitz model has become a workhorse for the study of a variety of issues on optimal taxation. In an important paper, Kaplow (1992) considers a model abstracting from the Mirrlees setting and asks the question: Should the government allow income tax deductions for uninsured losses as partial insurance? He shows that a tax system without the deductions Pareto dominates the tax system with the deductions. The intuition underlying Kaplow's result is that the availability of income tax deductions as partial insurance will distort and crowd out the purchase of private insurance, leading individuals to expose themselves to more risk than otherwise. In this paper we integrate Stiglitz (1982) self-selection model with Kaplow's (1992) income-tax-deduction model in a unified framework. Our aim is to tie together these two branches of the literature to address the question: Whether the income tax deduction for uninsured losses is part of an optimal income tax system. Most OECD countries allow some form of tax deductions for personal losses such as medical expenses and casualty losses. 1 For example, they account, for a high proportion of ISTT (income subject to taxation) in Denmark, Finland, Norway and Sweden, and a fairly high proportion in the Netherlands and France. Tax deductions for personal losses play a smaller but …