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Universal basic income and negative income tax: budget equivalency and tax progressivity

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  • Shim, Junwoo

Abstract

How should income be redistributed under a given government budget? We address this question in an incomplete markets economy calibrated to the U.S. income distribution. Holding government budgets initially identical across policies, we find that nonlinear tax-and-transfer policy distorts labor and capital more than the conventional linear policies along the transition path. Consequently, aggregate output in the new steady state relative to laissez-faire falls by 6.1% under a universal basic income, 20% under a negative income tax, and 27.4% under the nonlinear policy. When policy rules are held fixed over time, the nonlinear policy can deliver a Pareto improvement, conditional on an 8.72% tax deficit relative to GDP.

Suggested Citation

  • Shim, Junwoo, 2026. "Universal basic income and negative income tax: budget equivalency and tax progressivity," Macroeconomic Dynamics, Cambridge University Press, vol. 30, pages 1-64, January.
    • Handle: RePEc:cup:macdyn:v:30:y:2026:i::p:e64_61
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