Redistribution and efficiency: An empirical analysis of the relevant trade-offs of welfare state fiscal policies

This paper analyses the empirical trade-offs between equity and efficiency of various instruments of welfare state fiscal policies. To this end, we present and estimate different systems of structural equations and their error components through which these fiscal policies affect redistribution and economic growth. The empirical results, obtained by using a panel data of 35 high- and upper-middle-income countries over the period 1980-2014, suggest that not all policies depress economic growth rates. In relation to cash transfer variables, we can observe a significant empirical trade-off of old-age-related transfers. However, we do not find a significant equity-efficiency trade-off for working-age transfers. This variable has only a significant and positive effect in the redistribution equation, but does not affect the economic growth rate. If we consider measures of direct taxes, we find a significant and important trade-off for social contributions, and to a lesser extent for income taxes. We do not find a significant trade-off for capital taxes. These taxes only have a significant and negative unexpected effect on redistribution.