Rethinking the Welfare State

The United States spends significant amounts on non‐medical transfers for its working‐age population in a wide range of programs that support low‐ and middle‐income households. How valuable are these programs for U.S. households? Are there simpler, welfare‐improving ways to transfer resources that are supported by a majority? What are the macroeconomic effects of such alternatives? We answer these questions in an equilibrium, life‐cycle model with single and married households who face idiosyncratic productivity risk, in the presence of costly children and potential skill losses of females associated with non‐participation. Our findings show that a potential revenue‐neutral elimination of the welfare state generates large welfare losses in the aggregate, although most households support the move as losses are concentrated among a small group. We find that a Universal Basic Income program does not improve upon the current system. If, instead, per‐person transfers are implemented alongside a proportional tax, a Negative Income Tax experiment, it becomes feasible to improve upon the current system. Providing per‐person transfers to all households is costly, and reducing tax distortions helps to provide for resources to expand redistribution.