Basic Income and Negative Income Tax: A Comparison with a Simulation Model

An explicit unconditional basic income linked with a proportional tax rate and corresponding negative income tax schedule are generally thought to produce an equal distribution of incomes. They are so to say mathematically uniform systems. If we try to implement these schedules on an existing system of social transfers and taxes, the results may nevertheless be different. One problem is that taxes are generally calculated on yearly basis but social transfers are paid on monthly or even daily basis. There can be also other differences in the implementation. In this paper a simulation experiment with the Finnish tax and transfer system is presented. Two levels of basic income are defined: a normal basic income for adults over 18 years and a bit higher basic income (basic pension) for pensioners. Two alternative simulations are made: one corresponding to an unconditional basic income model and the other corresponding to the idea of negative income tax. Then the distributional effects and various transfer and income flows are studied.