An Unconditional Basic Income in the Family Context - Labor Supply and Distributional Effects

Basic income schemes are discussed among all political parties in Germany. A basic income is a specific form of a guaranteed minimum income for every citizen. Distributed unconditionally it could simplify the current German welfare state by replacing the numerous means-tested welfare transfers. The proposed basic income schemes combine several different instruments like a negative income tax, a at tax system and lump sum payments for health insurance. The concepts discussed differ in crucial design parameters mainly in the level of guaranteed income. We focus our analysis on the prominent proposal by the conservative party (Christian Democratic Union - CDU). By introducing their proposal of an unconditional basic income, all means-tested social transfers would be replaced by a negative income tax scheme that guarantees every citizen a minimum income, regardless of whether he or she is in work or unemployed. Social security payments would be substituted by a payroll tax for employers and a tax-financed basic pension would replace the current pension scheme. The transfer withdrawal rate would be considerably reduced to 50% and a at tax rate of 25% is suggested. Our paper analyzes the effects of the proposed basic income reform and two budget-neutral alternatives on labor supply and income distribution. A special focus lies on the work incentives for secondary earners in the family context. We use a detailed microsimulation model for the German tax system to simulate the reform and a structural household labor supply model for the estimations. The analyses are based on the micro data of the German Socio-Economic Panel (GSOEP). Our results show that the originally proposed basic income concept yields a very high deficit. Therefore, we also study two budget neutral alternatives. Introducing the originally proposed reform, our model predicts a large increase of labor supply due to high working incentives caused by the low tax rate. But raising the tax rate in order to meet the criteria of budget neutrality, labor supply adjustments turn negative. By comparing labor supply and distributional effects of the budget neutral alternatives, we observe that positive labor supply reactions coincide with increasing inequality, which indicates the general equity-efficiency trade-off. Furthermore, the unconditional character of the basic income causes especially for families a strong increase in incomes, which affects labor supply of couple households negative. At the same time the basic income concept itself generates serious disincentives for secondary earners.

Horstschräer, Julia, Markus Clauss and Reinhold Schnabel (2010), An Unconditional Basic Income in the Family Context - Labor Supply and Distributional Effects, ZEW Discussion Paper No. 10-091, Mannheim.