MEANS-TESTED VERSUS UNIVERSAL TRANSFERS - ALTERNATIVE MODELS AND VALUE JUDGMENTS

This paper illustrates the use of different criteria used to evaluate alternative tax and transfer systems. Means-tested and universal trans fer systems are compared, using numerical examples involving a small n umber of individuals, in order to highlight the precise effects on inc omes. The implications of fixed incomes and of endogenous incomes, usi ng constant elasticity of substitution utility functions, are examined . Comparisons between tax systems involve fundamental value judgements concerning inequality and poverty, and no tax structure can be regard ed as unambiguously superior to another. Judgements depend on the degr ee of inequality aversion and attitudes to poverty. However, in cases where means-testing is preferred, the desired tax or taper rate applyi ng to benefits is substantially less than 100 per cent.