Tax-Benefit Systems in Europe and the US: Between Equity and Efficiency
Institute for the Study of Labor (IZA); University College Dublin (UCD)
University of Cologne - Faculty of Management, Economics and Social Sciences; IZA
University of Cologne
Centre for European Economic Research (ZEW); University of Mannheim - School of Economics (VWL); Institute for the Study of Labor (IZA); University of Essex - Institute for Social and Economic Research (ISER)
Institute for the Study of Labor (IZA); University of Mannheim - Department of Economics; Centre for European Economic Research (ZEW) - Corporate Taxation and Public Finance Research; CESifo (Center for Economic Studies and Ifo Institute)
IZA Discussion Paper No. 5440
Whether observed differences in redistributive policies across countries are the result of differences in social preferences or efficiency constraints is an important question that paves the debate about the optimality of welfare regimes. To shed new light on this question, we estimate labor supply elasticities on microdata and adopt an inverted optimal tax approach to characterize the redistributive preferences embodied in the welfare systems of 17 EU countries and the US. Implicit social welfare functions are broadly compatible with the fiction of an optimizing Paretian social planner. Some exceptions due to generous demogrant transfers are consistent with the ignorance of behavioral responses by some European governments and are partly corrected by recent policy developments. Heterogeneity in leisure-consumption preferences somewhat affect the international comparison in degrees of revealed inequality aversion, but differences in social preferences are significant only between broad groups of countries.
Number of Pages in PDF File: 45
Keywords: social preferences, redistribution, optimal income taxation, labor supply
JEL Classification: H11, H21, D63, C63
Date posted: January 24, 2011
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