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Alternative Basic Income Mechanisms: An Evaluation Exercise with a Microeconometric Model

  • Colombino, Ugo

    ()

    (University of Turin)

  • Locatelli, Marilena

    ()

    (University of Turin)

  • Narazani, Edlira

    ()

    (University of Turin)

  • O'Donoghue, Cathal

    ()

    (Teagasc Rural Economy Research Centre)

We develop and estimate a microeconometric model of household labour supply in four European countries representative of different economies and welfare policy regimes: Denmark, Italy, Portugal and the United Kingdom. We then simulate, under the constraint of constant total net tax revenue (fiscal neutrality), the effects of various hypothetical tax-transfer reforms which include alternative versions of a Basic Income policy: Guaranteed Minimum Income, Work Fare, Participation Basic Income and Universal Basic Income. We produce indexes and criteria according to which the reforms can be ranked and compared to the current tax-transfer systems. The exercise can be considered as one of empirical optimal taxation, where the optimization problem is solved computationally rather than analytically. It turns out that many versions of the Basic Income policies would be superior to the current system. The most successful policies are those involving non means-tested versions of basic income (Universal or Participation Basic Income) and adopting progressive tax-rules. If – besides the fiscal neutrality constraint – also other constraints are considered, such as the implied top marginal top tax rate or the effect on female labour supply, the picture changes: unconditional policies remain optimal and feasible in Denmark and the UK; instead in Italy and Portugal universal policies appear to be too costly in terms of implied top marginal tax rates and in terms of adverse effects on female participation, and conditional policies such as Work-Fare, emerge as more desirable.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4781.

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Length: 36 pages
Date of creation: Feb 2010
Date of revision:
Publication status: Published in: Basic Income Studies, 2010, 5 (1)
Handle: RePEc:iza:izadps:dp4781
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  1. Immervoll, Herwig & Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup & Saez, Emmanuel, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," IZA Discussion Papers 1810, Institute for the Study of Labor (IZA).
  2. Standing Guy, 2008. "How Cash Transfers Promote the Case for Basic Income," Basic Income Studies, De Gruyter, vol. 3(1), pages 1-30, July.
  3. Haan, Peter & Wrohlich, Katharina, 2007. "Optimal Taxation: The Design of Child Related Cash- and In-Kind-Benefits," IZA Discussion Papers 3128, Institute for the Study of Labor (IZA).
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  9. Rolf Aaberge & Ugo Colombino & Tom Wennemo, 2006. "Evaluating alternative representations of the choice sets in models of labour supply," ICER Working Papers 2-2006, ICER - International Centre for Economic Research.
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  16. Richard Blundell & Mike Brewer & Peter Haan & Andrew Shephard, 2009. "Optimal Income Taxation of Lone Mothers: An Empirical Comparison of the UK and Germany," Economic Journal, Royal Economic Society, vol. 119(535), pages F101-F121, 02.
  17. François Bourguignon & Amadéo Spadaro, 2005. "Microsimulation as a tool for evaluating redistribution policies," PSE Working Papers halshs-00590863, HAL.
  18. Roed, Knut & Strom, Steinar, 2002. " Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable?," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 77-110, February.
  19. Sen, Amartya K, 1976. "Real National Income," Review of Economic Studies, Wiley Blackwell, vol. 43(1), pages 19-39, February.
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