Optimal taxation, social contract, and the four worlds of welfare capitalism

Drawing from the formal setting of the optimal tax theory, the paper identifies the level of Rawlsianism (or aversion to poverty) of the European social planners starting from the observation of real data and redistribution systems and builds a metric that allows measuring the degree of (dis)similarity of the redistribution systems analyzed. The shape of the social welfare function implicit in tax-benefit systems is recovered by inverting the optimal taxation model on actual effective tax rates, assuming that existing systems are optimal for some Mirrleesian social planner. Actual distributions of incomes before and after redistribution are obtained using a European survey on incomes and living conditions of households (EU-SILC 2007). Results are discussed in the light of standard classifications of welfare regimes in Europe. There appears to be a clear coincidence of high decommodification willingness and high Rawlsianism in the Scandinavian, social-democratically influenced welfare states. There is an equally clear coincidence of low decommodification willingness and utilitarianism in the Southern European welfare states. The Continental European countries group closely together in the middle of the scale (except Germany that scores among the highest), as corporatist and etatist. Anglo-Saxon liberal welfare states score close to Continental European countries. Finally the group of Eastern European countries seems to split in two subgroups, one similar to the Continental European countries and one, mostly composed by Baltic countries, with scarce willingness to decommodify citizens, similar to the Southern European model.