Optimal Taxation，Social Contract and the Four Worlds of Welfare Capitalism.doc

Optimal Taxation，Social Contract and the Four Worlds of Welfare Capitalism UCD CENTRE FOR ECONOMIC RESEARCH WORKING PAPER SERIES 2008 Optimal Taxation, Social Contract and the Four Worlds of Welfare Capitalism Olivier Bargain, University College of Dublin and Amedeo Spadaro, Paris School of Economics WP08/176 July 2008 UCD SCHOOL OF ECONOMICS UNIVERSITY COLLEGE DUBLIN BELFIELD DUBLIN 4 Optimal taxation, social contract and the four worlds of welfare capitalism Olivier Bargain?6?, Amedeo Spadaro?6? ?6? University College of Dublin, IZA Bonn and CHILD ?6? Paris School of Economics and Universitat de les Illes Balears, Palma de Mallorca April 2008 Ab1stract Drawing from the formal setting of the optimal tax theory (Mirrlees 1971), the paper identifies the level of Rawlsianism of some European social planner starting from the observation of the real data and redistribution systems and uses it to build a metric that allows measuring the degree of (dis)similarity of the redistribution systems analyzed. It must be considered as a contribution to the comparative research on the structure and typology of the Welfare State (Esping-Andersen, 1990). In particular we consider the optimal taxation model that combines both intensive (Mirrlees) and extensive (Diamond) margins of labor supply, as suggested by Saez (2002) in order to assess the degree of decommodification of seven European welfare systems. We recover the shape of the social welfare function implicit in tax-benefit systems by inverting the model on actual effective tax rates, as if existing systems were optimal according to some Mirrleesian social planner. Actual distributions of incomes before and after redistribution are obtained using a pan-European tax-benefit microsimulation model. Results are discussed in the light of standard classifications of welfare regimes in Europe. There appears to be a clear coincidence of high dec