Behavioural and Welfare Effects of Basic Income Policies : A Simulation for European Countries

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 United Kingdom. We then simulate, under the constraint of constant total net tax revenue, the effects of 10 hypothetical tax-transfer reforms which include various alternative versions of a Basic Income policy. We produce various indexes and criteria according to which the reforms can be ranked. The exercise can be considered as one of empirical optimal taxation, where the optimization problem is solved computationally rather than analytically. As long as the ranking of reforms is done according to welfaristic criteria it turns out that the most successful policies are those involving non means-tested versions of basic income and adopting progressive tax-rules. When other criteria (such as the implied top marginal tax rate or the effect on female labour supply) are also taken into account, the picture changes: universalistic policies remain optimal and feasible in countries like Denmark where female participation rates are very high; instead, in countries with low female participation rates (like Italy) universalistic policies appear to be too costly in terms of implied top marginal tax rates and in terms of adverse effects on female participation, and means-tested policies such as Work-Fare or Negative Income Tax seem more desirable