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Basic Income – testing of a fascinating policy

Basic Income, sometimes called Citizen’s Basic Income or Universal Basic Income, broadly refers to a state transfer given to each individual no matter their circumstances. It’s a policy proposal for alleviating inequality, attracting a lot of attention in policy circles around the world.

Job loss crop

Some of the main questions that form the debate around Basic Income are: what should be the level of Basic Income; how should a Basic Income policy interact with the rest of the tax-benefit system; how can it be paid for; what would be its impact on the income distribution; and would it discourage individuals to work? How to answer these questions brings us to how analysis using ISER’s state-of-the-art microsimulation model EUROMOD can help.

EUROMOD is the tax-benefit microsimulation model for the countries in the European Union. Year- and country-specific tax-benefit rules that are coded in the model are applied on household survey micro-data (1). EUROMOD identifies first who is entitled to receive a benefit/liable to pay a tax and social insurance contributions (SIC). It then calculates how much the benefit entitlement and tax/SIC liability should amount to. And finally, it calculates for each household in the micro-data their net income which is the sum of reported gross market incomes and simulated cash benefits, net of simulated direct taxes and SIC.

Using the model, researchers can study the first order effects of both actual and hypothetical policy reforms on the income distribution. What makes EUROMOD an essential tool for this type of analysis is that it takes into account the large heterogeneity of household circumstances and the complexity in the interactions between tax and benefit policies. In addition, EUROMOD is fit for analysing the impact of reforms on work incentives that can inform a separate analysis of labour supply responses to policy changes. Furthermore, the harmonisation of policy simulations and micro-data across countries enables consistent cross-country comparisons within the EU. Last but not least, EUROMOD is publicly available for research purposes, which makes it the only existing model of its kind for many EU countries.

Recent papers by Atkinson et al. (2017), Browne & Immervoll (2017) and Torry (2017) take on the challenge and use EUROMOD to study how a Basic Income scheme could look and what would be its direct impact on the income distribution. There are several distinct differences in the motivation and starting points of the three papers that lead the authors to draw different conclusions about the impact of a Basic Income scheme. Atkinson et al. (2017), who build on the tax-benefit policy proposals from Atkinson (2015), set out to tackle two main issues in the UK – that of increased relative government spending and families’ dependency on means-tested benefits and of rising income inequality levels. The return to a universal Child Benefit, that acts as a Basic Income for children; the substantial increases in tax rates, that make them much higher than current levels but not high by historical standards; and the Basic Income designed to only partially replace the current benefit system are some of the main policy choices that guide their analysis. Although Torry (2017) shares many similarities with respect to the design of a partial Basic Income and universal Child Benefit, he imposes restrictions on the increase of tax and National Insurance rates.

In contrast, the cross-country comparative analysis by Browne & Immervoll (2017) is guided by very different principles of implementing a Basic Income that fully replaces a range of non-elderly benefits and of abolishing the zero income tax bands without raising tax rates any further.

Both Atkinson et al. (2017) and Torry (2017) show that substantial reductions in the levels of income poverty and inequality can be achieved with a Basic Income policy and yet, the effects on inequality are twice as large in the former compared to latter analysis. Atkinson et al. (2017) show that the large income gains from BI especially at the bottom but also middle of the income distribution will result in substantial income losses for the richest. In comparison, the results by Torry (2017) reveal half the size of income losses for the richest households, arguably making his Basic Income scheme more politically feasible. In the UK, Browne & Immervoll (2017) show in contrast that the scheme will lead to a higher number of individuals in income poverty as some lower income households receive less state support under their Basic Income scheme. Studying the impact of the reforms on work incentives in the UK, Atkinson et al. (2017) conclude that incentives to enter the labour market for the poorest 60%/70% of the population will improve substantially with the Basic Income scheme while Torry (2017) and Browne & Immervoll (2017) draw a picture of more mixed results.

In summary, a benefit provided to everyone regardless of their circumstances may seem simple to operationalise. But designing how such a scheme would interact with the existing tax-benefit policies is a complex task and differences in the guiding principles can lead to very different conclusions about its impact on people’s circumstances. Tax-benefit models, such as EUROMOD, are vital for understanding what happens after policy choices and thus, crucial for informing the debate on policy reforms.

1 The data are from the European Union Statistics on Income and Living Conditions (EU-SILC). For the UK the data are from the Family Resources Survey.

We will be hosting a discussion event on Basic Income in Westminster on Monday 5 November, 10am-1pm, as part of the ESRC Festival of Social Science. Find out more here.