This paper estimates the welfare and distributional impact of two types of welfare reform in
the 15 (pre-enlargement) member countries of the European Union. The reforms are revenue
neutral and financed by an overall and uniform increase in marginal tax rates on earnings.
The first reform distributes the additional tax revenue uniformly to everybody (traditional
welfare) while the second reform distributes tax proceeds uniformly to workers only (in-work
benefit). We build a simple model of labor supply encompassing responses to taxes and
transfers along both the intensive and extensive margin. We then use EUROMOD to
describe current welfare and tax systems in European Union countries and use calibrated
labor supply elasticities along the intensive and extensive margins to analyze the effects of
the two welfare reforms. We quantify the equity-efficiency trade-off for a range of elasticity
parameters. In most countries, because of large existing welfare programs with high phaseout
rates, the uniform redistribution policy is undesirable unless the redistributive tastes of the
government are extreme. The in-work benefit reform, on the other hand, is desirable in a very
wide set of cases. We discuss the practical policy implications for European welfare policy.
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