Negative Income Tax and Universal Basic Income in the Eyes of Aiyagari

Yongsung Chang, Jong-Suk Han () and Sun-Bin Kim

Working Paper Series from Institute of Economic Research, Seoul National University

Abstract: We compare two redistribution programs - negative income tax (NIT) and universal basic income (UBI) - through the lens of Aiyagari (1994), a standard heterogeneous agent general equilibrium model. Mankiw (2020) proposes an example where an NIT and a UBI appear identical. We show that while Mankiw's example provides identical economic incentives to individual workers, the size of the government vastly differs. According to our quantitative analysis designed to replicate Mankiw's example, the UBI requires a program budget that is 15% of GDP, whereas the NIT requires 3.8% of GDP. Nevertheless, neither redistribution program significantly improves social welfare in the long run because of the reduction in capital and labor - via (i) tax distortion and (ii) a weak motive for precautionary saving and working.

Keywords: Redistribution; Negative Income Tax; Universal Basic Income; Government Budget (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: Negative income tax and universal basic income in the eyes of Aiyagari (2024)
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