Basic income reduces poverty and inequality: Are there costs in terms of efficiency?

Growing inequality since the eighties in most developed countries, together with the effects of recent economic crises, which affected more severely to lower incomes, pushed into the political agenda the need to improve the redistribution of the tax-benefit system. Systematically, one proposal to fight poverty and inequality is the implementation of a basic income. Detractors of this proposal argue that the cost of this measure is too high and criticise the potential disincentives to work and efficiency reduction. However, most studies simulating this kind of policy ignore the effects on employment and outcome. This paper simulates a bunch of reforms that replace the personal income tax with a basic income flat tax scheme. The analysis uses a behavioural microsimulation model of the Spanish tax-benefit system, which includes labour supply reactions. The results show that basic income - flat tax reform is feasible (in the sense that tax collection is kept constant in all simulations) and reduces poverty and inequality. However, the cost in terms of efficiency, measured by gross income and labour supply, is not negligible. This reduction in efficiency reduces social welfare and offsets the improvement of the social welfare achieved by the decrease of inequality.