Rethinking the Welfare State

86 Pages Posted: 14 Jul 2021

See all articles by Nezih Guner

Nezih Guner

Centre for Monetary and Financial Studies (CEMFI)

Remzi Kaygusuz

Sabanci University

Gustavo Ventura

Arizona State University (ASU)

Date Written: June 2021


The U.S. spends non trivially on non-medical transfers for its working-age population in a wide range of programs that support low and middle-income households. How valuable are these programs for U.S. households? Are there simpler, welfare-improving ways to transfer resources that are supported by a majority? Quantitatively, what are the macroeconomic effects of such alternatives? We answer these questions in an equilibrium, life-cycle model with single and married households who face idiosyncratic productivity risk, in the presence of costly children and potential skill losses of females associated with non-participation. Our findings show that a potential revenue-neutral elimination of the welfare state generates large welfare losses in the aggregate. Yet, most households support eliminating current transfers since losses are concentrated among a small group. We find that a Universal Basic Income program does not improve upon the current system. If instead per-person transfers are implemented alongside a proportional tax, a Negative Income Tax experiment, there are transfer levels and associated tax rates that improve upon the current system. Providing per-person transfers to all households is quite costly, and reducing tax distortions helps to provide for additional resources to expand redistribution.

JEL Classification: E62, H24, H31

Suggested Citation

Guner, Nezih and Kaygusuz, Remzi and Ventura, Gustavo, Rethinking the Welfare State (June 2021). CEPR Discussion Paper No. DP16275, Available at SSRN:

Nezih Guner (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid

Remzi Kaygusuz

Sabanci University

School of Management
Orhanli Tuzla
─░stanbul, 34956

Gustavo Ventura

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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