Means-Tested versus Universal Transfers: Alternative Models and Value Judgements

Abstract

This paper illustrates the use of different criteria used to evaluate alternative tax and transfer systems. Means-tested and universal transfer systems are compared, using numerical examples involving a small number of individuals, in order to highlight the precise effects on incomes. The implications of fixed incomes and of endogenous incomes, using CES utility functions, are examined. Comparisons between tax systems involve fundamental value judgements concerning inequality and poverty, and no tax structure can be regarded as unambiguously superior to another. Judgements depend on the degree of inequality aversion and attitudes poverty. However, in cases where means-testing is preferred, the desired tax or taper rate applying to benefits is substantially less than 100 percent. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester