The case for negative income tax with flat tax in Europe. An empirical optimal taxation exercise

Nizamul Islam and Ugo Colombino

No 454, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: We present an exercise in empirical optimal taxation for a sample of European countries from three areas: Southern, Central and Northern Europe. For each country, we estimate a microeconometric model of labour supply for both couples and singles. A procedure that simulates the households’ choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint. The optimality criterion is the class of Kolm's social welfare function. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional (means-tested) Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis in most cases show that: the General Negative Income Tax strictly dominates the other rules, including the current ones; the Unconditional Basic Income policy is better than the Conditional Basic Income policy; Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects; In-Work-Benefit policy is strictly dominated by the General Negative Income Tax and by the Unconditional Basic Income.

Keywords: Basic income; negative income tax; optimal tax; micro-simulation; welfare. (search for similar items in EconPapers)
Pages: 54 pages
Date: 2018-01
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (3)

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