Social Insurance Institution of Finland – Research Department

Basic income: simulation experiments with

Finnish dataPertti Honkanen

Euromod Workshop – Lisbon Oct. 2 &3, 2013

Basis social transfers in Finland, monthly figures,and proposed basic income levels in 2013 (adjusted with CPI to 2013)

Basic unemployment allowance 697,89 €Guarantee pension 738,82 €Study grant (university students living independently) 298,00 €Child benefit for the 1st child 104,19 €Minimum income guaranteed by social assistance, without housing costs

477,26 €

Basic income proposals - Green League 2007: 440 € 501,60 €- Green League, 2010: update 500 € 541,00 €- Left Alliance 2012: 620 € 630,50 €

Earlier simulations from Finland

• Haataja, Anita: Verotuki, pohjavähennys vai perustulo? Vaihtoehdot empiirisessä tarkastelussa. Teoksessa Innovatiivinen sosiaalipolitiikka. Toim. Heikki Niemelä ym. Sosiaali- ja terveysturvan katsauksia 25. Helsinki: Kansaneläkelaitos 1998

• Sallila, Seppo: Erään perustulomallin arviointia. Teoksessa Köyhyys ja hyvinvointivaltion muutos. Toim. Matti Heikkilä & Jouko Karjalainen. Helsinki: Gaudeamus 2000

• Honkanen, Pertti: Perustulo simulaatioharjoituksena. Teoksessa Honkanen, Pertti & Soininvaara, Osmo & Ylikahri, Ville: Perustulo. Kohti toimivaa perusturvaa. Helsinki: Vihreä sivistysliitto 2007

Some features of basic income models

• Often a simple assumption:basic income replaces all social transfers

• An alternative proposed in Finland:– Adjustment with the existing system

• Some earlier simulations excluded pensioners for technical and principal reasons

The Finnish pension system is to a certain degree compatible with basic income

• An equal minimum pension for all pensioners, regardless of the family status: guarantee pension since 2011

• The minimum pension is (practically) not taxed, if it is the sole source of income

• A regular income without means-testing– labour and capital incomes do not diminish the old-age

pensions• Capital incomes do not affect the invalidity pensions

(and labour incomes only after certain limits)

New simulation of basic income

• Data for 2010• An experiment wiht both an unconditional,

explicit basic income and with a negative income tax system

• Basic income is also calculated for pensioners, but it is greater than for others and it is called ”basic pension”

Technical features of the simulations

• SISU-model, data for 2010– about 23 000 individuals, 9 400 households

• All sub-models are run, except the real estate tax

• Comparisions are made between the different simulated data: base line vs. BI vs. NIT

• Financing with a flat rate tax so that the system is ”cost-neutral” (with the accuracy of € 100 million, 0.1 % tolerance for tax rate)

Unconditional basic income vs. negative income tax

• Definitions:B = mininum income (or guaranteed income)t = flat tax rateY = labour incomeD = disposable income

• Basic income: D = Y + B – tY• Negative income tax:

D = Y – (–B + tY) = Y + B – tY

Common features of alternative simulations

• Guaranteed income (basic income) € 600 /month for all residents with age over 18 years

• Basic pension € 850 /month• Universal flat rate tax for labour and capital income• No big changes in universal and means-tested transfers:

– child benefits, housing benefits, social assistance

• Budget equilibrium sought by adjusting the flat tax rate

Basic income• Taxable social transfers are paid according to

the current legislation but the basic income is substracted from them– if the transfers are smaller than the basic income,

they are not paid• The basic income and the basic pension are a

part of the taxable income, but the basic allowance in income taxation is equal

Negative income tax

• Adjustment with existing transfers as in the BI model

• Tax schedule:– If taxable incomes = 0 then tax = – (basic income)or – (basic pension) – Negative tax is paid only for residents wiht the age

of 18 years or more

Comparision of simulated transfer flows

TRANSFERS TRANSFERS, € million2010 BI CHANGE NIT CHANGE

Pensions (excl. national pension) 20 482 9 353 -11 129 9 337 -11 145Taxable social transfers 5 584 2 174 -3 410 2 174 -3 410National pension 2 148 15 -2 133 15 -2 133Child benefits etc. 1 584 1 584 0 1 584 0Non-taxed pension supplements and invalidity benefits 340 340 0 340 0Housing benefits 1 148 909 -238 2 126 979Means-tested social assistance 438 91 -346 70 -368Positive taxes 27 465 44 073 23 835Negative taxes -12 533Net taxes 27 465 44 073 16 608 11 302 -16 163Basic Income 0 20 661 20 661 0 0Basic Pension 0 13 293 13 293 0 0Total disposable income 92 062 92 133 71 92 147 85

Distributional effects

Decile DISPOSABLE INCOME, € million2010 BI CHANGE NIT CHANGE

1 4 450 5 145 695 5 462 1 0122 5 431 5 844 413 6 146 7153 5 990 6 269 279 6 438 4494 6 860 7 040 180 7 118 2585 7 520 7 663 143 7 651 1316 8 334 8 405 71 8 332 -27 9 574 9 596 22 9 482 -928 10 653 10 626 -27 10 479 -1739 12 577 12 371 -206 12 188 -38910 20 674 19 174 -1 499 18 850 -1 824

SUM TOTAL 92 062 92 133 71 92 147 85

Distributional effects 2

Indicator 2010 BI NITGini coefficient 26,6 24,2 23,2Poverty rate, % under 60 % of median income 13,9 11,5 8,9Poverty rate, % under 50 % of median income 6,9 4,4 2,9Poverty rate, % under 40 % of median income 2,3 0,8 0,5

Socio-economic groups

SOCIO-ECONOMIC GROUP DISPOSABLE INCOME, € million2010 BI CHANGE NIT CHANGE

Self-employed, incl. farmers 11 353 10 572 -781 10 452 -902Upper-level employees 25 375 25 687 312 25 280 -94Lower-lever employees 15 557 16 032 474 15 853 295Workers 16 062 16 552 490 16 377 315Students 1 131 1 369 237 1 395 264Pensioners 19 421 18 730 -691 19 464 43Doing domestic work 407 411 4 429 22Long-term unemployed 2 265 2 324 60 2 435 171Others 490 457 -34 463 -28SUM TOTAL 92 062 92 133 71 92 147 85

Notes. The classification refers to households. Households are classified accordingto the reference person, who is normally the person with the highest income in the household.Long-term unemployed: at least 6 months unemployed during the year.

Socio-economic groups: relative changes in disposable income

SOCIO-ECONOMIC GROUP CHANGE BI NIT

Self-employed, incl. farmers -6,9% -7,9%Upper-level employees 1,2% -0,4%Lower-lever employees 3,0% 1,9%Workers 3,0% 2,0%Students 20,9% 23,3%Pensioners -3,6% 0,2%Doing domestic work 1,0% 5,4%Long-term unemployed 2,6% 7,5%Others -6,9% -5,7%SUM TOTAL 0,1% 0,1%

Notes: the classification refers to households. Households are classified accordingto the reference person, who is normally the person with the highest income in the household.Long-term unemployed: at least 6 months unemployed during the year.

Transfer flows between households

Indicator BI NIT€ million

Positive change 3 305 3 664Negative change -3 234 -3 579Net change 71 85

number of householdsPositive change 1 499 360 1 567 554Negative change 1 051 639 983 445Total households 2 551 000 2 551 000

Relative transfer and income flows

Flow€ million % GDP % disp.

incomeNet flows, BI 3 305 1,8% 3,6%Net flows, NIT 3 664 2,1% 4,0%

Gross flows, BI (basic income + pension) 33 953 19,0% 36,9%Gross flows, NIT (negative tax) 12 533 7,0% 13,6%

Reasons for differences

• In the BI model the basic income is a part of the taxable income, which leads to diminishing housing benefits

• In the NIT model taxable income diminishes, which leads to rising housing benefits

• Because the transfers are greater in the NIT model, the flat tax rate is also greater and the distributional effects are stronger

Alternative parameters

Basic income, €/month Basic pension, €/month Flat taxe rate, %

500 750 41

600 850 45

700 950 49

-1000

-500

0

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600

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Net tax, €/month

Wate, €/month

Net tax: negative tax vs. current wage tax

Basic income 500 €, tax rate 41%

Basic income 600 €, tax rate 45%

Basic income 700 €, tax rate 49%

Wage tax schedule 2010

Marginal effective tax rate

0%

10%

20%

30%

40%

50%

60%

70%

1 2 3 4 5 6 7 8 9 10Decile

Effective marginal tax rate for wage-earners

Legislation 2010

BI 600 €, flat tax 45 %

Note: the marginal effective tax rate has been calculated only for individuals havingwage income, not for people potentially working as wage earners

Possibilities of variation

• Progressive tax instead of flat rate tax• A more detailed system of taxation (e.g.

separation of municipal and central government taxation)

• Reforming the housing benefit