Rethinking the Welfare State: The prospects for ... - e-Library

Rethinking the selfare state 32
5 permissibility of cream-skimming;
6 information failures;
7 concerns about the inadequacy of supply-side market responses to vouchering, and the
possibility that vouchers, under certain conditions, will simply entrench existing
monopolies, or create new ones.
Who should qualify for a voucher: means-tested or universal
entitlements?
Assuming that a case has been made for some form of state financing, in particular for a
tied form of demand-side transfer, a critically important question then arises as to who
should qualify, on the demand-side, for the entitlement. Here the central issue is likely to
be, in many contexts, whether the entitlement should be a universal entitlement or
whether the entitlement should be means-tested. The case for universal versus targeted or
means-tested benefits turns on several factors: first, universal benefits may advance
values of social solidarity and equality of life chances. Second, universal benefits may be
responsive to incomplete private insurance markets by requiring mandatory pooling.
Third, where the risks or contingencies to which the government is responding in a
particular program in question are borne more or less universally, this may argue for
universal benefits. In contrast, if they are focused on identifiable subsets of the
population, some form or targeting or means-testing may be appropriate. Fourth,
universal benefits may provide a mechanism of political co-option by harnessing the
political voice of articulate citizens in order to ensure adequate program benefits for both
themselves and the less well-endowed and less articulate. 56 On the other hand, universal
benefits, depending on program design, may constrain individual citizens’ choice and
autonomy and reduce individual welfare by denying choices that may be more fully
responsive to individual preferences. Even where the state has opted for a universal
entitlement program, this tension will exist with respect to the availability of partial or
complete exit options, such as the right to make additional top-up payments beyond the
value of the voucher to secure superior packages of services, or alternatively to opt out of
the universal entitlement program altogether and secure private provision.
If a universal entitlement is rejected in favour of a targeted or means-tested
entitlement, how means are tested is likely to prove contentious: should it entail a static
measure of ability to pay or should it also encompass past circumstances that explain
present inability to pay or future prospects of ability to pay? Also, should means be
extended to non-financial disabilities such as race and gender (viewing, for example,
quota-based affirmative action programs as in effect a form of voucher system)? Even
conventional income or asset tests raise significant incentive problems. As Bradford and
Shaviro point out, 57 an income test creates a moral hazard problem due to the incentive
effect of conditioning the grant on income when earning effort cannot be well observed,
although income is presumably a signal of some distributionally important underlying
attribute such as low wage or bad luck. Income-conditioned vouchers may exacerbate the
resulting incentive problems when they are layered on top of each other and other
income-conditioned aspects of the overall tax system. The combined effective marginal
tax rate in some cases may approach or even exceed 100 percent. With respect to asset
tests, liquid asset tests such as those used in the US food stamps program distort both