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

  • Pertti Honkanen EMAIL logo
From the journal Basic Income Studies


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.

Appendix: SISU model and simulation experiment

The SISU model is composed of the main model that combines the whole income transfer system, and of 12 sub-models that can also be used independently in simulation calculations. Each sub-model thus generally contains the taxes and benefits belonging to the same legislative collection. The SISU model takes the following sections of legislation into account (in brackets years of legislation on which legislation is modelled).

  1. Income taxation (1980/1990–2014)

  2. Real estate taxation of natural persons (2008–2014)

  3. Sickness insurance contributions and parental allowance (1982–2014)

  4. Unemployment security (1985–2014)

  5. National pensions and benefits related to them (1957/1991–2014)

  6. Child home care allowance (1985–2014)

  7. Child benefits, maternal grant and maintenance allowances (1948–2014)

  8. Municipal day care fees (1997–2014)

  9. Student financial aid, housing supplement and study grant (1992–2014)

  10. General housing allowance (1990–2014)

  11. Housing allowance for pensioners (1990–2014)

  12. Social assistance (1989–2014)

In the calculations for this article all but sub-models 2 (Real estate taxation) and 8 (Municipal day care fees) were used and run. In Table 6 the different benefits were grouped in bigger entities. The section “other taxable transfers” includes unemployment benefits, sickness insurance and parental benefits, child home care allowances and study grants. The housing benefits include the general housing allowance, the housing allowance for pensioners and the housing supplement for study grants. The simulation experiment has no effect on child benefits, maternal grants and maintenance allowances (sub-model 7), student housing supplement (part of sub-model 9, not means-tested) and on some benefits related to national pensions (part of sub-model 5), which include some pension supplements and non-taxable invalidity benefits.

The SISU model does not simulate the occupational pensions. In most cases the total pension income consists of an occupational pension and an income-tested national pension. The national pension is simulated in the model. When BI or NIT is adjusted with the existing system it is deducted first from the national pension and then the remaining part is deducted from the occupational pension.


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Published Online: 2014-12-2
Published in Print: 2014-12-1

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