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Welfare reform in european countries: a micro-simulation analysis

Immervoll, Herwig, Kleven, Henrik Jacobsen, Thustrup Kreiner, Claus and Saez, Emmanuel (2004) Welfare reform in european countries: a micro-simulation analysis. 4323. Centre for Economic Policy Research, London, UK.

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Abstract

This Paper estimates the welfare and distributional impact of two types of welfare reform in 14 member countries of the European Union. The reforms are revenue neutral and financed by an overall and uniform increase in marginal tax rates on earnings. The first reform distributes the additional tax revenue uniformly to everybody (traditional welfare) while the second reform distributes tax proceeds uniformly to workers only (in-work benefit). We build a simple model of labour supply encompassing responses to taxes and transfers along both the intensive and extensive margin. We then use EUROMOD to describe current welfare and tax systems in all European Union countries (except Sweden) and use calibrated labour supply elasticities along the intensive and extensive margins to analyse the effects of the two welfare reforms. We quantify the equity-efficiency trade-off for a range of elasticity parameters. In most countries, because of the large existing welfare programs with high phase-out rates, the uniform redistribution policy is, in general, undesirable unless the redistributive tastes of the government are extreme. The in-work benefit reform, on the other hand, is desirable in a very wide set of cases. We discuss the practical policy implications for European welfare policy.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2004 the authors
Library of Congress subject classification: H Social Sciences > HV Social pathology. Social and public welfare. Criminology
H Social Sciences > HJ Public Finance
Journal of Economic Literature Classification System: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General
Sets: Collections > Economists Online
Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 4323
Date Deposited: 05 Jun 2008 10:18
URL: http://eprints.lse.ac.uk/5390/

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