Working Paper: CEPR ID: DP16275
Authors: Nezih Guner; Remzi Kaygusuz; Gustavo Ventura
Abstract: 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.
Keywords: Taxes and Transfers; Household Labor Supply; Income Risk; Negative Income Tax
JEL Codes: E62; H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Elimination of the welfare state (P16) | Aggregate welfare loss (D69) |
| Elimination of the welfare state (P16) | Welfare loss among unskilled single females (J79) |
| Elimination of the welfare state (P16) | Welfare gain among skilled married couples (D69) |
| Elimination of the welfare state (P16) | Increase in hours worked (J29) |
| Elimination of the welfare state (P16) | Increase in output (E23) |
| Universal Basic Income (UBI) (H53) | Aggregate welfare loss (D69) |
| Negative Income Tax (NIT) (H24) | Welfare gain (D69) |
| Negative Income Tax (NIT) (H24) | Majority support among newborns (J13) |