The targeting of Social Security: A Tax Reform Approach*
Paper number: 99/18
Paper date: July 1999
Paper Category: Discussion Paper
Income-based targeting (or means-testing) reduces social security benefits as income rises. This form of targeting entails a well-known incentive distortion: the prospect for the recipients of losing part of their benefits if they were to earn more can deter them to work harder. In this paper, we argue that targeting is more than a simple redistribution device that takes from the rich to give to the poor. The question involves starting from a particular tax-transfer scheme in force, and asking whether everybody would like to depart from it. Adopting a general environment, we derive simple conditions under which there exist such directions of change and we identify these directions. Specializing further the model and using numerical calculations we estimate the effects of inequality and tax evasion on the desirability of targeting.
JEL Classification Nos: H21, H26, H53
Keywords: Means-tested social security, tax evasion, Tax reform.
Corresponding Author: Jean Hindriks, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 263237, fax (44) 1392 263242, email: Jean.Hindriks@exeter.ac.uk
* The author thanks the University of Essex and especially Mick Keen for their hospitality during the period in which this research has been conducted. Financial support from the European Commission under the HCM programme is gratefully acknowledged. The author also thanks Phillippe de Donder, Frank Cowell, Louis Gevers, Pierre Pestieau and Jean-Charles Rochet for helpful comments and suggestions.