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Efficient Redistribution of Lifetime Income through Welfare Accounts *
Author(s) -
Bovenberg A. Lans,
Hansen Martin Ino,
Sørensen Peter Birch
Publication year - 2012
Publication title -
fiscal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.63
H-Index - 40
eISSN - 1475-5890
pISSN - 0143-5671
DOI - 10.1111/j.1475-5890.2012.00151.x
Subject(s) - economics , redistribution (election) , welfare , equity (law) , pareto principle , public economics , government budget , social welfare , transfer payment , microeconomics , public finance , macroeconomics , operations management , political science , law , market economy , politics
Compared with a conventional tax–transfer system, individual welfare accounts can redistribute lifetime incomes at a lower efficiency cost. These welfare accounts employ mandatory contributions rather than taxes to finance social transfers to people of working age. We describe a design for welfare accounts that guarantees a Pareto improvement if behavioural responses to the accounts improve the public budget. We also develop a formula for quantifying the impact of welfare accounts on the government budget and economic efficiency. Applying the formula to Danish data, we find that the proposed welfare accounts would generate a Pareto improvement, thus improving the trade‐off between equity and efficiency. We discuss how the gains from welfare accounts can be distributed in an equitable manner.