Social Insurance Institution of Finland – Research Department Basic income: simulation experiments with Finnish data Pertti 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 allowance697,89 € Guarantee pension738,82 € Study grant (university students living independently)298,00 € Child benefit for the 1st child104,19 € 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 individuals, 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 rate Y = labour income D = 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

Distributional effects

Distributional effects 2

Socio-economic groups Notes. The classification refers to households. Households are classified according to 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 Notes: the classification refers to households. Households are classified according to 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

Relative transfer and income flows

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, €/monthBasic pension, €/monthFlat taxe rate, %

Marginal effective tax rate Note: the marginal effective tax rate has been calculated only for individuals having wage 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