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Welfare reform in European countries: a micro-simulation analysis

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  • Immervoll, Herwig
  • Kleven, Henrik Jacobsen
  • Kreiner, Claus Thustrup
  • Saez, Emmanuel

Abstract

This paper estimates the welfare and distributional impact of two types of welfare reform in the 15 (pre-enlargement) 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 European Union countries and use calibrated labour supply elasticities along the intensive and extensive margins to analyze 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 large existing welfare programmes with high phase-out rates, the uniform redistribution policy is undesirable unless the redistributive tastes of the government are extreme. The inwork 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. Ce document évalue l’impact sur les transferts sociaux et la répartition des revenus de deux types de réforme de la protection sociale dans 15 pays membres (avant élargissement) de l’Union européenne. Ces réformes n’ont pas d’incidence sur les recettes publiques et elles sont financées par un relèvement général et uniforme du taux d’imposition marginal des gains. La première réforme distribue uniformément entre tous les citoyens le surcroît de recettes fiscales (protection sociale traditionnelle), alors que la seconde distribue uniformément les recettes fiscales uniquement entre les travailleurs (prestations liées à l’emploi). On construit un modèle simple de l’offre de main-dâ€

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Paper provided by EUROMOD at the Institute for Social and Economic Research in its series EUROMOD Working Papers with number EM1/04.

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Date of creation: 01 Feb 2004
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Publication status: published
Handle: RePEc:ese:emodwp:em1-04

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