Rethinking the Welfare State

Kaygusuz, Remzi; Guner, Nezih; Ventura, Gustavo

Abstract

The U.S. spends significant amounts 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? 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, although most households support the move as losses are concentrated among a small group. We fond 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, it becomes feasible to improve upon the current system. Providing per-person transfers to all households is costly, and reducing tax distortions helps to provide for resources to expand redistribution.

Citation

Kaygusuz, . R., Guner, N., & Ventura, G. (2023). Rethinking the Welfare State. Econometrica, 91(6), 2261-2294. https://doi.org/10.3982/ECTA19921

• Journal Article Type: Article
• Acceptance Date: Jun 18, 2023
• Publication Date: 2023-11
• Deposit Date: Aug 11, 2023
• Journal: Econometrica
• Print ISSN: 0012-9682
• Electronic ISSN: 1468-0262
• Publisher: Econometric Society
• Peer Reviewed: Peer Reviewed
• Volume: 91
• Issue: 6
• Pages: 2261-2294
• DOI: https://doi.org/10.3982/ECTA19921
• Public URL: https://durham-repository.worktribe.com/output/1715674