Essay: Recognizing the strength of universal program
It is important to recognize that the strength of the case for universal program is inversely related to a country’s current level of social welfare spending. To see the logic behind this caveat, consider two countries, one with relatively low spending on social programs, the second with relatively high spending. Other things equal, marginal tax rates will be higher in the second. Suppose both countries then expand universal programs by one percentage point of GDP. To finance the increase both will need to raise tax revenues by roughly one percentage point of GDP, which, in turn, will require an increase in marginal tax rates. In both countries the tax increases will create incentives that lead to economic inefficiency. The economics of taxation tells us that the inefficiency will be greater in the country with the initially higher marginal tax rates.
This analysis implies that in countries where current expenditures on social welfare programs are a relatively small percentage of GDP, new or expanded universal transfers will create relatively small efficiency losses. Canada, Korea, Ireland, and the U.S. are examples. The case for expanding universal income transfers is stronger for those countries than for countries with relatively high expenditures on social welfare programs, such as Denmark, France, and Sweden. To the extent there are economic limits to spending on transfers, the U.S. is further away from them than many other affluent countries.
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