The Efficiency Case for Universality

The paper compares universal social programs with targeted social benefits. We define "universality" as separability of the tax/transfer system in income and other non-monetary attributes, and introduce the concept of "parallel equity" a requirement that like differences in needs should be treated alike. We develop a model based on optimal tax theory which shows that under specified assumptions universality is efficient as well as equitable; departures from universality result in an inefficient structure of net marginal tax rates. Our key assumptions are that individual-specific needs necessitate a fixed exogenous monetary expenditure, and that needs are exogenous, observable, and uncorrelated with other relevant variables. We then relax these assumptions and describe the limited circumstances under which departures from universality may be desirable.