The welfare state provides universal insurance for workers against accidents in the workplace. In equilibrium, this insurance does not generate adverse safety incentives to firms. Noninternalized insurance makes workers sort themselves nonoptimally to firms and choose higher individual effort levels to prevent accidents as compared to insurance schemes that are internalized in the market. Welfare state insurance may, therefore, generate higher safety levels than perfect experience rating, not lower. An optimal income taxation scheme in the welfare state implies progressive taxation. The optimal tax level increases with the extent of the welfare state. Copyright 1995 by Royal Economic Society.