Can a Basic Income and a Flat Tax replace the Personal Income Tax?

Abstract

[eng] Growing inequality since the eighties in most developed countries together with the effects of the Great Recession, which affected more severely to lower incomes, pushed in the political agenda the need of improving the tax-benefit system. Systematically, one proposal to fight poverty and inequality is the possibility of implementing a basic income. Detractors of this proposal argue that the cost of this measure is too high and criticise the potential disincentives to work. However, some studies simulating this kind of policy ignore this second issue. This research aims to simulate some scenarios where this basic income is established combined with a proportional tax. The analysis is conducted using a behavioural microsimulation model of the Spanish tax-benefit system called Gladhispania. Specifically, there are 4 different reforms simulated, were the unique difference among them is the amount of the basic income disposed to the individuals. Thus, the proportional tax rate is higher as higher is the amount of the Basic Income, in order to accomplish a tax-revenue neutral reform. The results are compared among them and using as baseline the current situation (the 2016 personal income tax scenario). The results show that, the higher the Basic Income amount is, the more equality, progressiveness and redistribution, we see and also less poverty. On the other hand, in terms of efficiency, the reform may give some disincentives to work, as the hours worked are lower the bigger the amount of the Basic Income is. Also, gross income is reduced in the distribution after the reform is performed, which reveals another source of efficiency loss. In terms of budget feasibility, the reform is designed to be tax revenue neutral, as the analysis of the impact on the State’s budget is not the aim of this research.