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

Abstract

-We develop and estimate a microeconometric model of household labour supply in four European countries with differing 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-reform basic-income policies: Guaranteed * This work is part of a CHILD (Centre for Household, Income, Labour and Demographic Economics, www.child-centre.it) project. Colombino, project coordinator, developed the microeconometric model and is responsible for the interpretations and opinions expressed. O'Donoghue created datasets for the microeconometric model and performed initial experiments. Narazani and Locatelli worked on datasets and the initial estimation exercises. Narazani performed the recent estimations and simulations. We thank Isilda Shima (at the European Centre for Social Welfare Policy and Research) who contributed under a research contract with the Department of Economics of Turin. We thank two anonymous referees for helpful comments.Copyright ©2010 The Berkeley Electronic Press. All rights reserved.Minimum Income, Work Fare, Participation Basic Income and Universal Basic Income. We produce indexes and criteria by which the reforms can be ranked and compared to 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. Many versions of basic income policies would be superior to the current system, and the most successful are not meanstested (Universal or Participation Basic Income) and adopt progressive tax rules. If constraints other than fiscal neutrality are considered, such as the implied top marginal tax rate or the effect on female labour supply, the picture changes: unconditional policies remain optimal and feasible in Denmark and the United Kingdom; while in Italy and Portugal universal policies appear instead to be too costly in implied top marginal tax rates and adverse effects on female participationconditional policies such as Work Fare emerge as more desirable there.

Using a Microeconometric Model of Household Labour Supply to Design Optimal Income Taxes*

“…Moreover, it has been applied, for example, by Fortin et al . (1993), Colombino (1998), and Colombino et al . (2010).…”

“…The closest examples in which a similar approach is adopted are Fortin et al . (1993), Aaberge and Colombino (2006), Colombino et al . (2010), and Blundell and Shephard (2012) 3 .…”

“…16 16 Colombino (1998), Colombino et al . (2010), and Blundell and Shephard (2012) have used a different method, where the maximum utility is not found by simulation but is measured instead by the expected maximum utility (McFadden, 1978).…”

“…Aaberge and Colombino (2006) have reported on the preliminary results of a simpler version of the exercise illustrated in this paper. Colombino et al . (2010) have analysed the basic income support mechanisms in some European countries.…”

Getting the Poor to Work: Three Welfare-Increasing Reforms for a Busy Germany

“…Our study adds to the literature on revenue neutral basic income systems for several European countries (see, e.g., Colombino et al 2010;Colombino and Narazani 2013). A closely related study of a revenue neutral flat tax is conducted in Aaberge et al (2000).…”