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Negative Income Tax and Universal Basic Income in the Eyes of Aiyagari

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  • Yongsung Chang
  • Jong-Suk Han
  • Sun-Bin Kim

Abstract

We compare two redistribution programs - negative income tax (NIT) and universal basic income (UBI) - through the lens of Aiyagari (1994), a standard heterogeneous agent general equilibrium model. Mankiw (2020) proposes an example where an NIT and a UBI appear identical. We show that while Mankiw's example provides identical economic incentives to individual workers, the size of the government vastly differs. According to our quantitative analysis designed to replicate Mankiw's example, the UBI requires a program budget that is 15% of GDP, whereas the NIT requires 3.8% of GDP. Nevertheless, neither redistribution program significantly improves social welfare in the long run because of the reduction in capital and labor - via (i) tax distortion and (ii) a weak motive for precautionary saving and working.

Suggested Citation

  • Yongsung Chang & Jong-Suk Han & Sun-Bin Kim, 2021. "Negative Income Tax and Universal Basic Income in the Eyes of Aiyagari," Working Paper Series no141, Institute of Economic Research, Seoul National University.
    • Handle: RePEc:snu:ioerwp:no141
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    Keywords

    Redistribution; Negative Income Tax; Universal Basic Income; Government Budget;
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