Equity-efficiency implications of a European tax and transfer system

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Guerer E.

SOCIAL CHOICE AND WELFARE, vol.57, no.2, pp.301-346, 2021 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 57 Issue: 2
  • Publication Date: 2021
  • Doi Number: 10.1007/s00355-021-01314-1
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, Academic Search Premier, IBZ Online, International Bibliography of Social Sciences, Periodicals Index Online, ABI/INFORM, Abstracts in Social Gerontology, Business Source Elite, Business Source Premier, EconLit, MathSciNet, Political Science Complete, Public Affairs Index, Social services abstracts, Sociological abstracts, Worldwide Political Science Abstracts, zbMATH
  • Page Numbers: pp.301-346
  • Keywords: H21, H24, F55
  • Middle East Technical University Affiliated: No


This study simulates three income tax scenarios in a Mirrleesian setting for 24 EU countries using data from the 2014 Structure of Earnings Survey. In scenario 1, each country individually maximizes its own welfare (benchmark). In scenarios 2 and 3, total welfare in the EU is maximized over a common budget constraint. Unlike scenario 2, the social planner of scenario 3 differentiates taxes by country of residence. If a common tax and transfer system were implemented in the EU, countries with a relatively higher mean wage rate-particularly those in Western and some of the Northern European countries-would transfer resources to the others. Scenario 2 implies increased labor distortions for almost all countries and, hence, leads to a contraction in total output. Scenario 3 produces higher (lower) marginal taxes for high- (low-) mean countries compared to the benchmark. The change in total output depends on the income effects on labor supply. Overall, total welfare is higher for the scenarios involving a European tax and transfer system despite more than two thirds of all the agents becoming worse off relative to the benchmark. A politically more feasible integrated tax system improves the well-being of almost half of all the EU but considerably reduces the aggregate welfare benefits.