Combining microsimulation and optimization to identify optimal universalistic tax-transfer rule

Ugo Colombino and Nizamul Islam

No 2021-06, LISER Working Paper Series from Luxembourg Institute of Socio-Economic Research (LISER)

Abstract: As a response to a changing labour market scenario and to the concerns for increasing costs and bad incentives of traditional income support policies, the last decades have witnessed, in many countries, reforms introducing more sophisticated designs of means-testing, eligibility and tagging. In this paper, we consider an alternative direction of reform that points towards universality, unconditionality and simplicity. Our main research question is whether tax-transfer rules designed according to these alternative criteria might be superior to the current one and could therefore be proposed as a policy reform. We adopt a computational approach to the design of optimal tax-transfer rules, within a flexible class. The exercise is applied to France, Germany, Italy, Luxembourg, Spain and the United Kingdom. The results suggest some common features in all the countries. The optimal tax-transfer rules feature a universal unconditional basic income or, equivalently, a negative income tax with a guaranteed minimum income. The tax profiles are much flatter than the current ones. For most social welfare criteria, and most countries, the simulated tax-transfer rules are superior to the current ones. These results confirm that policy reforms inspired by the principle of Universal Basic Income and Flat Tax might have good chances to dominate the current tax-transfer rules.

Keywords: empirical optimal taxation; microsimulation; microeconometrics; social welfare evaluation of tax-transfer rules (search for similar items in EconPapers)
JEL-codes: C60 H20 H30 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2021-09
New Economics Papers: this item is included in nep-cmp, nep-eur, nep-isf, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:irs:cepswp:2021-06

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