Equity-efficiency implications of a European tax and transfer system

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.


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Citation Formats
E. Gürer, “Equity-efficiency implications of a European tax and transfer system,” SOCIAL CHOICE AND WELFARE, vol. 57, no. 2, pp. 301–346, 2021, Accessed: 00, 2023. [Online]. Available: https://hdl.handle.net/11511/101841.