From idea to experimentNotes on the Finnish basic income experiment

study

The 6th International Conference Well-being in the Information Society (WIS) 2016

Linna Building September 17 2016

Ville-Veikko Pulkka researcher

The Finnish Social Insurance Institution Kelaville-veikko.pulkka@kela.fi

The structure of the presentation

• Background for the experiment study

• The essential findings and recommendations of the research group

• How to plan a successful experiment?

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What is basic income?

• “an income unconditionally granted to all on an individual basis, without means test or work requirement” (BIEN)

• however, basic income cannot be discussed at a general level• level of basic income, taxation and replaceable benefits

determine the outcomes • the framing effect on support (Kela surveys)• political targets vary drastically− in the 1980s an answer for technological unemployment, today

emphasis on labour supply

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Background for the experiment study

• a reference was made to a basic income experiment in the governmental programme of the centre-right wing coalition government of Prime Minister Juha Sipilä (The Centre Party of Finland) in May 2015

• in autumn 2015, after evaluation a consortium led by the Finnish Social Insurance Institution Kela was appointed to study the suitability of different basic income models for the experiment

• a preliminary study was published on 30 March 2016• deadline for the final report on 15 November 2016

• according to current plans, the basic income experiment is expected to be launched in January 2017

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The assignment handed down by the Prime Minister’s Office

• the assignment outlined four different options to explore and develop: • full basic income − the level of BI high enough to replace almost all other benefits, perhaps excluding

earnings-related benefits • partial basic income− could replace the most of the basic security benefits (e.g. basic social assistance,

basic unemployment benefit, labor market subsidy, sickness allowance, rehabilitation allowance, minimum parental allowances, startup grants), but earnings-related benefits left intact

• negative income tax− income transfers via taxation system

• other possible models

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The assignment handed down by the Prime Minister’s Office

• the government’s main target: diminish disincentives in social security = increase employment • continuation of the activation policies: to increase employment

by emphasising labour supply• currently a number of means-tested benefits are paid in

addition to each other • joint effect: different work disincentives− unemployment traps − income traps− bureaucracy traps

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How to measure the traps?

• unemployment traps = economic disincentives to participate in labour markets • indicator: participation tax rate > 80% (how many percentages

your gross salary is diminished by taxes, lost benefits and earnings-related service charges (e.g. day care charges) if you start to work)

• income traps = economic disincentives to increase workload • indicator: effective marginal tax rate > 70% (how many

percentages your gross salary is diminished if you increase your workload)

• bureaucracy traps = psychological disincentives• due to the means-tested benefits delays, reporting, falling

through the social security net7

What was studied in the preliminary study?

• What is basic income?• earlier basic income experiments abroad• basic income discussion in Finland• support for basic income• microsimulations: costs, effects on poverty and income

distribution, work incentives (participation tax rate & effective marginal tax rate)

• legal preconditions• implications on municipalities• implications on employment services• scientifically reliable research setting • research started autumn 2015, published on 30 March 20168

Support for basic income in Finland (Airio, Laatu, Kangas & Koskenvuo 2015)

BI as such

BI €500/m, tax 40%

BI €600/m, tax 45%

BI €700/m, tax 50 %

BI €800/m, tax 55 %

Very good idea 29.0 8.2 5.3 6.8 10.4

Good idea 40.3 26.5 29.1 24.6 18.6

Bad idea 18.5 29.5 33.3 35.2 31.2

Very bad idea 8.1 30.2 26.4 27.2 33.8

No opinion 4.1 5.6 5.9 6.2 6.09

Different budget-neutral BI models, flat rate taxes and effects on income distribution and poverty (microsimulations by Honkanen & Simanainen)

Basic income, euros/month

Flat tax rate, % Gini Poverty-

rate, %0 (current system) NA 26,51 13,03

450 41,5 25,94 12,29500 43,5 25,50 11,98550 45,0 25,15 11,74600 46,5 24,79 11,39650 48,5 24,33 11,10700 50,0 23,96 10,91750 52,0 23,49 10,47800 53,5 23,11 10,21

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The essential findings of the preliminary study

• full basic income too expensive (flat rate taxes 60% €1000 BI & 79% €1500 BI) and politically difficult to test

• negative income tax experiment not reliable before an access to real-time information of incomes

• budget-neutral partial BI does not automatically remove the economic disincentives (housing allowances, additional social assistance and earnings-related benefits cannot be replaced)• strengthening economic work incentives costs or means diluting

the current level of social security• bureaucracy traps can be partly solved: less delays,

reporting and falling through the social security net11

Participation tax rates of a person living alone (a simple case)

Salary change

Current legislation

BI €550/month & tax model

BI €750/month & tax model

Flat rate tax Current, progressive

Flat rate tax Current, progressive

No means tested benefits, but eligible for housing allowance and social assistance 0 > €500 80.0 50.2 31.8 63.9 38.5

0 > €1000 65.1 63.6 47.0 74.0 50.30 > €2000 65.2 60.8 45.9 66.2 44.2

€1000 > €2000

65.3 58.0 44.9 58.3 38.2

Adjusted basic unemployment allowance and eligible for housing allowance and social assistance

0 > €500 36.9 50.2 47.5 63.9 38.50 > €1000 51.7 63.6 57.2 74.0 50.30 > €2000 66.3 60.8 51.1 66.2 44.2

€1000 > €2000

80.9 58.0 44.9 58.3 38.2

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Participation tax rates of a lone parent (a difficult case)

Salary change Current legislation

BI €550/month & tax model

BI €750/month & tax model

Flat rate tax Current Flat rate tax Current

0 > €500 29.3 54.4 28.8 60.4 27.7

0 > €1000 42.0 64.7 43.7 72.8 36.6

0 > €2000 70.3 81.2 64.6 87.8 59.9

0 > €3000 78.4 82.7 71.2 87.3 65.8

€1000 > €2000 98.7 97.8 85.6 102.9 83.1

€2000 > €3000 94.6 85.6 84.5 86.4 77.8

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The recommendations of the research group

• two-pronged and compulsory randomisation • nationwide (representive sample, generalizable results) • more intensive regional (for examining externalities) • a weighted sample possible• test and control groups

• power calculations: a sample size big enough to observe statistically significant results • studying the entire adult population (excl. pensioners) would be

reasonable, but due to the limited budget, we recommended to focus on low-income earners

• and exclude people under 25 years old

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The recommendations of the research group

• partial basic income (min. €550/mth) the most realistic option • corresponds to the monthly net level of many of the basic

security benefits provided by Kela • would not replace earnings-related benefits, housing allowances

and additional social assistance• in an ideal test situation: different levels of basic income and tax

rates

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An ideal research setting

Model Basic income, EUR Tax rate

A0 560 current

A1 560 40

A2 560 45

B1 660 43

B2 660 48

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Legal preconditions (Tuovinen & co.)

• The Constitution of Finland • the principle of non-discrimination− may limit the number of models− may set conditions for the sampling− obligatory or voluntary sample?

• the right to basic subsistence− diluting the current level of social security probably not possible− would strengthen the economic work incentives, but also increase poverty

and income hardship • in the last resort it will be the Constitutional Committee that decides • aim of assessing reforms required for societal improvements may

constitute an acceptable justification for deviating from the principle of non-discrimination

• The EU law• the exportability of basic income • when a person will be eligible for basic income when moving to Finland

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The basic income experiment bill (25 August 2016)

• €560 tax free partial basic income• current progressive taxation• persons between 25 and 58 years of age living in Finland

who in November 2016 receive basic unemployment allowance or labour market subsidy

• nationwide randomisation, a sample of 2000, obligatory• lasts two years• sample size, randomisation and exclusive target group

are explained by time and budget constraints• criticism: too small sample, too exclusive target group and an

unrealistic model (due to the budget deficit)• given the governments targets: ”good enough”• possible extension up to the government

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How to plan a successful basic income experiment?

• discussing a basic income at a general level problematic• need to define targets specifically

• political commitment crucial • before (enough resources and clear targets/indicators) • during (enough resources and patience) • after the experiment (enough resources for good-quality

evaluation)• awareness of a demanding process• cooperation between politicians, civil servants, Tax

Administration, researchers and other relevant institutions must be open and flowing

• a basic income experiment is not ”just an experiment”19

Basic income’s possible health implications

• an important indicator which should be followed during and after the experiment(s)

• Dauphin negative income experiment 1974–1979• everyone in the town was eligible for NIT• health implications were not studied• Evelyn Forget’s extensive study ”The Town With No Poverty”

based on registries (2011)• considerable positive effects on health, and especially mental

health, during and even after the experiment • should not be translated into Finnish context without

reservations• however, emphasises the possible diverse effects of basic income

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