Experimenting Basic Income (BI) in Finland

3. May 2016 Paris, Maison des Sciences ėconomiques

Olli Kangas (olli.kangas@kela.fi)Professor, Research DirectorKela, Social Insurance Institution of Finland

The preliminary report delivered thge 30 March 2016

• Which models are the most suitable for the experiment• What is the level of the monthly payment

• How to combine BI with income-related benefits and other basic benefits

• Tax treatment of different models• What are the strengths and weaknesses of

different models in the context of the EU and the Finnish Constitution

• Recommendation: what is / what are the model/models to be further explored

2

The working group evaluates the models, research setting and samples to be experimented

• The task for the working group is to make a plan for the experiment

• After the first report (due to 30 March 2016) the Government decides which models should be further developed

• Later in the year 2016 the Government will decide which model/s will be experimented, what is the target population and what is the experimental setting

• That is under preparation3

Models explored and developed

• Full basic income (BI)• The level of BI is high enough to replace almost all insurance-based

benefits • Must be rather a high monthly sum, e.g.1 000€-1 500€. Realistic?

• Partial basic income• Replaces all ’basic’ benefits but almost all insurance-based benefits left

intact • Minimum level should not be lower than the present day minimum level

of basic benefits (€ 550 - € 600 a month)• Plus income-related benefits and housing & child allowance

• Negative income tax• Income transfers via taxation system

• Other models• Perhaps low BI plus ’participation’ income 4

What next?

• Writing the law on the experiment (before summer 2016)• Hearing of interest organisations• Parliamentary discussion

− Constitutional committee

• Specifying the model (before summer 2016)• Levels (net) single +2 children sngl parent+2 chld• Basic unenmpl. €589 €724 €724• Social assistance €486 €1069 €1190

• What is the right level of benefit. Not too costly but eliminates the need for social assistance?

• How to take into consideration specific needs of single parents? 5

Experimental settings (an example of an optimal research setting, nothing selected yet)

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• To get scientifically reliable results and evidence for policy making the experimental setting must

• Include a sufficient number of households• rather than individuals

• Be nationally representative• A nation level randomization

• local experiments in order to capture networking, institutional and interaction effects and various externalities

• e.g. local municipalities with 10%, 30% random sampling. • To increase the sample size:

• Kela benefits will be used as a source of extra funding (sample 7,000)

Experimental setting

Model BI € Tax rateA0 590 PRESENT

A1 590 40%

A2 590 45%

B1 690 45%

B2 690 50%7

Sample size

Significant effect

Effective marginal tax rates in the present system and in the €750 BI world (Flat rate tax = 52%; single mother, 2 children live in Helsinki, rent €750)

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• Effective marginal tax rates remain high also in the BI model

• The main problems are linked to housing allowances and ’adjusted’ unemployment compensation

• BI as such is not a solution• Taxes in the BI model

’behave’ more logically• BI may solve bureaucratic

traps and waiting periods when moving from a status to another one

Effective marginal tax rates in the present system and in the €550 BI world (single person, lives outside capital area, rent €570, present taxation).

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• If the BI is financed through the present tax system, effective, marginal tax rates are much lower than in the present social policy system.

• The main problems are now linked to social assistance and housing allowance• Both problems are smaller in

the BI model• In 0 –income group there still is

a need for social assistance

• Problem: the model is not cost-neutral• Extra resources are needed

Social assistance Housing

allowance

Tax

Work income

BI may solve other problems and create a number of new ones…

The model Flat rate tax

Gini Poverty (60%)

Winners(000)

Losers(000)

Present system

-- 26.9 15.6 -- --

BI 500€ 41.5 26.4 15.3 1,849 774

BI 550€ 43.5 26.0 14.8 1,807 816

BI 600€ 45.0 25.7 14.3 1,826 796

BI 650€ 46.5 25.4 13.9 1,832 791

BI 700€ 49.0 25.0 13.5 1,770 853

BI 750€ 50.5 24.6 13.1 1,786 836

BI 800€ 52.5 24.2 12.6 1,752 87110