The hidden part of the basic income iceberg

A considerable amount of literature has emerged on BI. Previous literature has mainly discussed the normative desirability (e.g. Bidadanure, Reference Bidadanure2019; Birnbaum & De Wispelaere, Reference Birnbaum and De Wispelaere2020; Van Parijs & Vanderborght, Reference Van Parijs and Vanderborght2017) and political feasibility of BI (e.g. De Wispelaere, Reference De Wispelaere2016; Martinelli & Pearce, Reference Martinelli and Pearce2019; McDowell, Reference McDowell2023; Perkiö, Reference Perkiö2020). Others used survey data to explore public opinions and attitudes towards BI and found quite substantial support levels among the population (e.g. Laenen et al., Reference Laenen, Van Hootegem and Rossetti2022; Parolin & Siöland, Reference Parolin and Siöland2020; Rincón et al., Reference Rincón, Vlandas and Hiilamo2022; Roosma & van Oorschot, Reference Roosma and van Oorschot2020; Stadelmann-Steffen & Dermont, Reference Stadelmann-Steffen and Dermont2020; Vlandas, Reference Vlandas2021). At the same time, in-depth interviews reveal that people still strongly adhere to the traditional deservingness criteria of control, need, and reciprocity (Rossetti et al., Reference Rossetti, Roosma, Laenen and Abts2020). Support among unions and organised labour, on the contrary, remains lukewarm (Cigna, Reference Cigna2022; Vanderborght, Reference Vanderborght2006).

There have also been several lines of empirical research on the possible impact of BI, particularly on poverty and employment. Researchers have, for example, looked at lottery winners to see what happens if people suddenly get free and unconditional money (e.g. Marx & Peeters, Reference Marx and Peeters2008; Picchio et al., Reference Picchio, Suetens and van Ours2018). A number of BI pilots have also been launched (e.g. Calnitsky & Latner, Reference Calnitsky and Latner2017; García, Reference García2022; Kangas et al., Reference Kangas, Jauhiainen, Simanainen and Ylikännö2021; Muffels, Reference Muffels, Laenen, Meuleman, Otto, Roosma and Van Lancker2021). Still, as insightful as these experiments are, they essentially run on money falling from the sky and do not tell us much about what it could do for poverty at the scale of an entire economy.

In the past years, microsimulation studies have entered the debate, seeking to provide an answer to this question. Microsimulation models have a long history in ex-ante policy analysis. They can reveal in detail the possible distributional and revenue implications both of current and alternative policies and cast light on the best approaches to policy design. This makes them fit to explore the trade-offs that arise from a BI, especially seeing it has not yet been implemented anywhere at the national level. Table 1 gives an overview of recent studies simulating a BI. There is some evidence that a higher BI tends to perform better in terms of poverty and inequality reduction, but overall, available results suggest a wide variety of potential outcomes, adding fuel to ongoing debates regarding its effectiveness and desirability as a policy reform.

Table 1. Selection of recent microsimulation studies on BI

We argue that the lack of consistency in expected outcomes can be ascribed to the multidimensionality of the ‘basic income’ concept. Although there may be a consensus on the core principles underlying a BI, its actual implementation can take on various forms and adaptations. Table 1 clearly conveys how every study seems to assume a different scheme, making the comparability of the results hard. For that reason, universal BI should be rather understood as a myriad of schemes that differ substantially along a range of policy dimensions than as one uniform policy. Key design dimensions include coverage, adequacy, uniformity, financing, integration, and accumulation. These dimensions interact in complex ways. Every choice matters, down to the very last policy detail. Moreover, BI schemes that are similar in level and design can still produce divergent outcomes depending on the country-specific context, especially the interplay with the tax-benefit system in place.

In this regard, it raises concerns that BI debates tend to focus on a limited set of issues only. Who is entitled? How high is the BI? But these issues merely constitute the proverbial tip of the iceberg, giving the illusion of a disarmingly simple idea. There is much more hidden under the sea line, notably all the policy choices that must be made (as visualised in Figure 1). Those choices go beyond the mere size of the benefit amount. Unless one is advocating the elimination of the entire existing tax-benefit system, it is especially important to consider which parts of the system remain, and how the BI will then interact with the remaining policies.

Figure 1. The basic income iceberg metaphor.

Throughout this paper, we establish that recognising the multidimensionality of the BI concept is crucial for understanding its vast and far from uniform range of potential outcomes. We empirically illustrate how the level of income provided, the design of the reform and the country-specific context in which it is implemented all determine the impact a BI can have on poverty and inequality. Rather than making sweeping claims either in favour of or against a BI, we demonstrate here that outcomes are strongly contingent upon these factors. This nuance is currently lacking in the BI debate, including much of the academic debate.

In doing so, we build on the work of the authors in Table 1, such as Browne and Immervoll (Reference Browne and Immervoll2017) and Martinelli (Reference Martinelli2020), to a certain extent replicating and validating their findings. Yet, our study differs substantially from what has been done so far in several aspects. To the best of our knowledge, the study conducted by Browne and Immervoll marked the first effort in exploring the outcomes of a BI in a cross-nationally comparative context. Our study serves as a useful complement and extension to their work. Although Browne and Immervoll’s scenarios were informative, they were for example not fully comparable as they depended upon the guaranteed minimum income (GMI) in each country included in their study. In contrast, our scenarios are designed to be fully comparable across countries, facilitating a more robust analysis of the impact of a BI in different contexts. Furthermore, while Browne and Immervoll’s focus primarily centred on describing the patterns of winners and losers, our study sheds light on the impact of a BI on poverty and inequality. Our study further distinguishes itself by focusing on different countries, namely Belgium and the Netherlands, two interesting contrasting cases. The paper by Martinelli, on the other hand, deals with analysing the critical factor determining the potential impact of a BI in a single-country setting. In this regard, our paper aligns well with Martinelli’s work, as we also delve into the intricacies of implementing a BI. Martinelli describes and illustrates the broad trade-offs in BI policy design with regard to the objectives it serves, being affordability, adequacy, and the advantages of a radically simplified welfare system. Our study goes further and demonstrates that even seemingly minor choices can significantly influence the poverty and inequality impact of a BI. As to the remaining literature, most studies emphasise only the generosity of the BI amount provided, while (probably inadvertently) overlooking the importance of design and national context. So while previous research has explored various aspects of BI, our study is the first to bring together how level, design, and context all shape the effectiveness and redistributive outcomes of a BI.

Modelling basic income

We use tax-benefit microsimulation modelling to explore the costs and outcomes of introducing a BI in the Netherlands and Belgium. Essentially, this type of modelling combines data on household incomes and characteristics across the population with the tax-benefit policy rules and can be used to answer what-if questions (e.g. in the case of a BI).

We utilise the tax-benefit microsimulation EUROMOD. EUROMOD calculates for all EU member states, in a comparable manner, the effect of cash benefits, direct taxes, and social insurance contributions on household incomes in line with national tax-benefit rules in place. Accordingly, we can compare net disposable incomes of households across the different policy scenarios with and without a BI in place. The baseline scenario corresponds to prevailing policies in 2019 (i.e. status quo), and the hypothetical BI scenarios are described in more detail in the next section.

We make use of both model family and empirical microsimulation modelling. While most studies either focus on one approach or the other, we choose to combine the strengths of both. For our distributional analyses, we make use of representative household survey data, notably the European Union Statistics on Income and Living Conditions (EU-SILC) from the year 2019 (Belgium) and 2018 (Netherlands), which were the most recent available datasets at the time of the analysis. In order to compare the pure institutional architecture of tax-benefit systems across countries and illustrate how policies interact with each other, we use hypothetical household data. The HHoT tool of EUROMOD allows to simulate how the tax-benefit system works for a selection of well-defined households, while having full control over the characteristics of interest.

EUROMOD is a static microsimulation model, in the sense that it assumes that the characteristics of individual decision units do not change over time. This makes the model mainly useful for the analysis of so-called first-order effects, which capture the estimated direct (or day-after) impact of a policy reform on, for example, poverty and inequality levels. Policy reforms can, however, also influence an individual’s behaviour (so-called second-order effects). The latter have a rather indirect character and play an important role in the BI debate. Such second-order estimations are not included in EUROMOD, but behavioural models in the context of such a wide-ranging reform as a BI should be handled with caution anyway, as estimates of labour supply responses are in the first place intended to deal with marginal policy changes. In addition, existing empirical evidence about the relationship between BI and labour supply points to very little change in people’s labour market behaviour (see de Paz-Báñez et al., Reference de Paz-Báñez, Asensio-Coto, Sánchez-López and Aceytuno2020).

Non-take-up of public provisions is a serious problem in contemporary welfare states (see e.g. Bargain et al., Reference Bargain, Immervoll and Viitamäki2012; Janssens & Van Mechelen, Reference Janssens and Van Mechelen2022), to which a BI could provide an answer. EUROMOD however does not (sufficiently) account for non-take-up. So instead, we have to assume full take-up of benefits and allowances.

Hypothetical basic income scenarios

We simulate six counterfactual BI scenarios in Belgium and the Netherlands. The scenarios not only differ in terms of generosity, but also in terms of design/funding mechanism. The scope of our exercise is limited to non-elderly individuals. The provisions of benefits for those above the statutory retirement age are assumed to remain in place unchanged such that their incomes will not be directly affected by the BI reforms.

The most typical BI proposals intend to replace all social programs, including their multitude of benefit types and eligibility rules, with a BI – pursuing the objective of simplifying the system. In that case, the amount granted should be generous enough to satisfy an individual’s basic needs. In recent years, a case has been made for a partial as opposed to a full BI scheme, as it might be more practical and politically feasible. When it is a complement to rather than a substitute for existing social assistance and other social benefits, a lower BI could act as a solid foundation underpinning the income distribution. However, a partial BI would not address the problems of a means-tested system (i.e. complexity, administrative burden, lack of knowledge, stigma, and insecurity).

Three levels of generosity

We consider three benefit levels, ranging from a modest partial to a generous full BI, to capture the effect of generosity. To make the scenarios comparable across countries, we fix the BI amount as a percentage of median income. The monthly median incomes in Belgium and the Netherlands are close to each other, being €2,048 and €2,059, respectively, resulting in similar BI levels. For the lowest level of generosity, we simulate a BI equal to 10% of median income for all working-age adults, i.e. €205 per month in both countries (see Table 2). Inspired by the OECD equivalence scale, we grant every child (below 18 years old) a BI equal to 30% of the adult amount, which is 60 euros per month. For the medium amount, we raise the BI to 30% of median income, which corresponds to €615, resp. €618 for all Belgian, resp. Dutch working-age adults, and €185 per month for each child. For the most generous BI, we further increase the amount until the level of the poverty line, i.e. 60% of median income. This adds up to an amount of €1,230, resp. €1,235 per month in Belgium, resp. in the Netherlands. Every child in its turn receives a BI of €370 per month.

Table 2. Overview of (monthly) BI amounts

Variation by design

The exact form a BI should take, on the contrary, is generally ignored and/or overlooked. There are many design features to take into consideration to make the reform (quasi) budget-neutral – which is a necessity given the considerable total cost of BI. First, one has to decide which existing measures will be abolished in order to maintain budget neutrality. As the level of generosity increases, more existing benefits have to be abolished. We start with abolishing benefits that most closely align with the BI philosophy. With increasing generosity, additional design choices have to be made. We focus on three crucial design features and develop two alternative scenarios for each of these features that can be considered as two opposed options. At the lowest level of generosity, we explore the choice between including the BI in the means-test or not. At the medium level, we investigate the effect of the funding source by varying between abolishing tax advantages or social benefits. At the highest level of generosity, we explore the impact of the accompanying tax system, either progressive or flat.

We now describe the design features of the different scenarios in more detail.

Design choice I: are other benefit amounts affected by the basic income?

The lowest BI amount can be financed by abolishing and/or reducing some of the existing tax benefits for working-age individuals. We abolish the tax-free base allowance in Belgium and the general tax credit in the Netherlands, which already come close to the idea of a BI. Additionally, in Belgium, we also remove the so-called marital quotient such that spouses are assessed fully independent, in line with the individual nature of a BI. Finally, the tax deduction of professional expenses in Belgium and the work tax credits in the Netherlands – both comprehensive tax advantages for employees/self-employed of which a large share of the population benefits – are capped. The social protection system, on the other hand, is fully maintained. This implies one has to decide how the newly introduced BI is going to interact with the set of policies still in place: will the amounts of other, especially means-tested, benefits be affected by a BI? Hence, in the first scenario (further called ‘NMT’) we do not take BI into account in the social assistance means-test, while in the second scenario (called ‘MT’) we do include it.

Design choice II: which parts of the existing tax-benefit system are (not) maintained?

At the medium level of generosity, we identify two broad options: cutting either tax expenditures or social expenditures. In the third scenario (further called ‘TAX’), we abolish all existing tax benefits for households below pension age, building on the ‘low generosity’ MT scenario. In the fourth scenario (called ‘SOC’), we alternatively abolish all child-related benefits and a selection of social benefits (social assistance, unemployment benefits, survivor benefits, and early retirement benefits). Disability and housing benefits are left unaffected, as these are intended to compensate for specific needs or circumstances. Within the tax relief scheme, now only the tax-free allowance or equivalent zero-rate tax band is removed, all other tax advantages remain in place. Finally, in both alternative scenarios, we need to make the BI taxable in order to be budget neutral. This can have two implications for government revenues. First of all, revenue from personal income taxes will increase due to higher taxable incomes. Second, if social insurance contributions are also calculated on taxable incomes, these revenues will increase as well.

Design choice III: accompanied by a flat or progressive tax?

For the most generous amount, we build further on the previous steps. We abolish the existing tax benefits, child-related benefits, and social benefits, as well as make BI taxable. In order to compensate for the remaining deficit, we also have to raise personal income taxes. Again, there are several possibilities. We could simply increase existing progressive tax rates, which will be the case in the fifth scenario (further called ‘PROG’). As such, personal income taxes would have to be raised by 14% in Belgium and 27% in the Netherlands. This means that the highest tax bracket would increase from 50% to 57% in Belgium and from 52% to 66% in the Netherlands (see appendix for full tax schedule). Or, following the proposal by Atkinson (Reference Atkinson1995), we couple a BI with a flat tax in the last scenario (called ‘FLAT’). That way, excessive labour supply inefficiencies could be avoided. If we would fully replace the existing income taxation scheme, this BI reform in Belgium would require a flat tax of 45%. In the Netherlands, a flat tax of 27% would suffice. Table 3 provides an overview of the differences in design between the scenarios.

Table 3. Overview of BI schemes

In total, we thus simulate six distinct BI scenarios at three levels of generosity, which evidently come with a price tag attached. There is no set cost of BI; it all depends on how generous the scheme is. If all individuals below the statutory retirement age received a monthly BI, the annual cost would reach 18 billion euro (BE) / 28 billion euro (NL) in the lowest scenario and 115 billion euro (BE) / 172 billion euro (NL) in the highest scenario. Table 4 provides a step-by-step overview of the different levers we pull to achieve budget-neutrality.

Table 4. Overview of (1) total cost for each scenario and (2) budgetary resources to achieve budget-neutrality

Note: Budgetary savings are not always identical to the reported budgets in the appendix because interaction effects are taken into account and the elderly are still eligible for all previously existing benefits. Source: Own calculations based on EUROMOD and micro-data from EU-SILC.

Understanding the results

The previous graphs and tables revealed relatively diverging patterns, both across countries and proposals. In this section, we attempt to understand exactly why the various BI scenarios have such different implications for household incomes across countries. Model family simulations can help explain in more depth how a BI would affect a low-income household. We show a selection of illustrative graphs depicting the impact on a hypothetical couple with two children, the most common family type. Other model family types can be found in the appendix. Figure 3 and following decompose the net disposable income of a couple with two children, aged 7 and 14. The labour market status of the breadwinner ranges from jobless to full-time employed at the minimum wage, while the partner is always assumed to be inactive. The black line represents the total monthly income that corresponds to x hours of work. We also include the poverty line, defined as 60 % of the national median disposable income, to assess income adequacy.

Figure 3. Net disposable income of a low-income couple with two children under the current system.

The same level of basic income but an alternative design will have a different impact

We also observed that, apart from the level of payment, the design specifics and the nature of the funding mechanism strongly determine the impact a BI can have on poverty and inequality. To better grasp the significance of design, we illustrate in Figures 4 to 6 how the different BI schemes would impact the income position of the same model family.

Figure 4. Income effect of including a BI in the means-test or not (low BI scenario).

Figure 5. Income effect of the funding source for a BI (medium BI scenario).

Figure 6. Income effect of coupling a BI with a progressive or flat tax (high BI scenario).

Figure 4 clearly illustrates why the impact on poverty is larger when BI is not included in the means-test as compared to including it, and also why the poverty reduction in Table 5 was larger for Belgium as compared to the Netherlands. When not included in the means-test, social assistance recipients receive a BI fully on top of their original benefits, entailing a stronger increase for low incomes than would be the case when BI is part of the means-test for allocating other benefits. This design choice necessitates a lower budget allocated towards means-tested benefits, but also means that many welfare recipients would see their incomes rather unaffected. It is also noteworthy that in Belgium means-tested benefits are tapered away at a much lower income level compared to the Netherlands.

Table 5 shows that a BI funded by replacing existing social protection arrangements would increase poverty without exception. Figure 5 (right panel) shows that this type of reform would indeed mainly lower the incomes of those with no or a part-time job, pushing them further below the poverty line. A jobless couple with two children for example that previously received means-tested and child-related benefits equal to about €2000 now has to make ends meet with only a BI of about €1500. This is not surprising: the resources that were initially targeted towards low incomes are now redistributed equally among the population. When a BI is funded by abolishing tax benefits, it creates a universal layer on top of the current social protection system. In that case, that same jobless couple will now still receive means-tested and child-related benefits on top of their basic income of €1500 (see left panel of Figure 5). They do have to pay slightly more taxes due to the abolition of all tax credits and deductions. However, since tax advantages typically tend to benefit those with higher incomes, low-income households are not as affected by this withdrawal. Replacing tax benefits with a universal BI thus implies a pro-poor redistribution and a decrease in poverty. This is more pronounced in Belgium than in the Netherlands, due to the difference in the distribution of tax versus social benefits and the substantial increase in social insurance contributions (see previous section).

We not only find that the way taxes are designed to fund the BI matters for poverty outcomes (see Table 5), but that the impact differs between both countries. This mainly relates to the fact that the Netherlands has a more progressive income tax system than Belgium. Figure 6 shows that replacing this more progressive system with a flat tax would greatly reduce incomes at the bottom as they would be taxed at a higher rate and thus pay substantially more taxes (right panel).