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1. Introduction
Giving all citizens a modest, unconditional income with no strings attached. This idea
might seem utopian, but has a surprisingly diverse pedigree. In the course of the last two centuries, it has been independently thought up under a variety of names, ranging from ‘territorial dividend’ and ‘state bonus’ to ‘demogrant’, ‘citizen’s wage’, ‘universal benefit’, and ‘basic income’, mostly without any success of being actually implemented (Van Parijs, 2001). In the late sixties and early seventies, the idea enjoyed a sudden popularity in the United States and Canada, and even was put forward in a bill by president Nixon. Although the proposed bill got through congress, it was foundered in the senate and soon to be shelved and just about forgotten. However, in the last two decades it has gradually become the subject of an unprecedented and fast expanding public discussion in certain countries in the European Union. Some see it as a simple and effective remedy for many social problems, including unemployment and poverty. Others denounce it as a crazy and ethically objectionable proposal. Although the debate on the subject is fierce, a lot is still to be researched about the societal and economic effects of a Universal Basic Income (UBI) policy.
UBI policy would entail giving all citizens a modest income, irrespective of any income sources and without requiring any present or past work performance (Van Parijs, 1992). As most western welfare states have social security systems that are based on means tests and reciprocity1, implementing an UBI would entail significant restructuring of these systems. Especially the notion of labour supply has been discussed widely when considering UBI. Critics often mention huge financing costs and a possible decline of GDP in connection with higher taxation rates necessary to finance an UBI scheme (Gilroy, Heimann & Schopf, 2013). Some disagree with the unconditional character per se since it would exploit the people who are willing to work and thus will enhance parasitic behaviour (Van Donselaar, 2009). That is, workers are needed to produce the income that will be distributed unconditionally. If recipients are not held to a reciprocal objection to help produce that income, they supposedly exploit the workers that do (Wilderquist, 2011). This
1 That is, welfare payments are only given to individuals whose income is below a certain level (i.e. means test). To (keep) receiving these payments individuals often have to fulfil certain work and/or job seeking requirement (i.e. reciprocity).
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reduces labour supply and general productivity and thus reduces the sustainability of the UBI scheme.
However, to what extent an UBI exactly induces this parasitic behaviour, or more generally influences workers their labour decisions, remains relatively unclear. In an attempt to answer this question, several large scale field experiment have been conducted in both the US and Canada between 1968 and 1980. These experiments were government sponsored experiments in which certain neighbourhoods, or in one case even a whole village, were given the right to an unconditional guaranteed income2. In general, a small decline in labour supply was found, but a debate persists whether this decline was higher or lower than beforehand expected (Wilderquist, 2004). Also, these experiments are often criticized for being performed in a highly politicized environment (Noguera & De Wispelaere, 2006), due to the fact that welfare is a highly charged political issue. Hence, the results might have been used to push a certain political agenda of welfare reform, rather than objectively used for studying the exact effects of such a reform. Nogueare & De Wispelaere therefore argue for the use of laboratory experiments when assessing UBI policy.
As labour supply is highly related to taxation, as is the hypothetical funding of an UBI, this subject relates to a strain of literature on taxpayer behaviour in presence of financing public services. In general, previously conducted experiments find that workers supply more labour when some form of redistribution or insurance is in place (Ortona et al. 2008; Ottone & Ponzano, 2011; Keser et al., 2015). That is, individuals supply more labour when either taxes are directly redistributed, used for the funding of a public good, or used as an insurance against economic risk. However, in the case of an UBI, individuals receive an unconditional payment which is independent of their (individual) work effort, which has both a redistributive as an insurance purpose3. As no previous work has
2 Most experiments made use of a Negative Income Tax (NIT) which is a system of refundable tax credits that guarantees eligible tax filers a minimum income. Tax filers with no income receive the full benefit in cash. Persons with taxable income receive a cash benefit only to the extent their NIT benefit exceeds their tax liabilities. It is widely recognized that a guaranteed income can be provided by means of an NIT or UBI, and that both mechanisms are capable of achieving exactly the same net transfer of income (Harvey, 2006; Van Parijs, 2004)
3 An UBI is redistributive in nature because the unconditional payment has a greater marginal effect on individuals with a relatively low income (i.e. supply less labour) compared to individuals with a higher income. It has an insurance nature because even when individuals are unable to work due to economic risk (i.e. involuntary unemployment) they can fall back on this UBI.
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addressed the unconditional nature of an UBI in a laboratory experiment directly, this paper therefore makes use of a laboratory experiment to answer the following research question:
To what extent does a Universal Basic Income (UBI) affect labour supply and does labour supply react differently to taxation when an UBI is in place?
By answering this question, it expands the work of Ortona et al. 2008, Ottone & Ponzano, 2011, and Keser et al., 2015, by introducing the notion of unconditionality. That is, effects on labour supply under taxation can be studied when individuals receive unconditional payments, rather than when tax revenues are (directly) redistributed or used as insurance. In a more general fashion, results can be used to uncover behavioral insights on how individuals would react in terms of labour supply and taxation when receiving an unconditional income.
To summarize results of this paper, we found that: a) labour supply decreases monotonically as tax rates increase. b) there are no significant differences in labour supply when an UBI is in place compared to when there is no UBI in place. c) Tax revenues increase monotonically up to a certain tax rate; after which they decline (i.e. existence is found of a so-called ‘Laffer Curve’). d) There are no significant differences in tax average revenues when an UBI is in place compared to when no UBI is in place. However, tax revenues are significantly higher in the UBI treatment when only tax rates above fifty percent are taken into consideration.
The paper is setup as follows: In the next section, an overview of existing literature on Basic Income and taxpayer behaviour is given. Thereafter, the experimental design and procedures are described. Section 3 presents the theoretical predictions and discusses the behavioural propositions. In Section 4 results of the experiment are discussed. Finally, section 5 discusses the main findings and concludes the paper.
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2. Previous literature
2.1. Universal Basic Income
Since the 1980’s no western welfare state has implemented new innovative social programmes. Despite rapid changes in the economy and labour market, social protection systems have mostly experienced only minor modification (Koistinen & PerkioΜ, 2014). In the recent economic crisis, the dominant policy line has been to retrench prevailing social policy systems, cut public expenditure, and narrow the eligibility criteria for existing benefit systems. Despite this tendency of cutbacks, there have been initiations to introduce fundamental social security reforms. A reoccurring idea in Europe is a Universal Basic Income (UBI): an income granted to all members of society as a right without means testing or conditions. Throughout recent decades, several initiatives for UBI in its various forms have been made in different political and socio-economic contexts, but the reform nowhere succeeded in becoming reality. In recent years the idea has spread rapidly and it has gained increasing attention in countries where the debate was already established.
So what exactly is an UBI? The leading definition, formulated by one of the most vocal proponents of an UBI, Philippe Van Parijs, is as follows: “A basic income is an income unconditionally paid to all its members, without means test or work requirement. In other words, it is a form of minimum income guarantee that differs from those that now exist in various European countries through its being paid (1) to individuals rather than households; (2) irrespective of any income from other sources; and (3) without requiring any present or past work performance nor the willingness to accept a job if offered” (Van Parijs, 1992, p.1). Hence, an UBI is granted by the virtue of an unconditional entitlement, and the idea that any income from other sources will come on top of the basis it provides.
In short, proponents argue that guaranteeing an income to everyone would eradicate poverty and reduce unemployment (Van Parijs, 2004; Standing, 2008), and emphasise the simplicity and transparency of a welfare system with an UBI, as it would reduce bureaucracy and its costs (Van Parijs, 2001). However, the notion of unconditionally often raises questions about the behavioural responses of the recipients of an UBI and the consequent feasibility of such a policy. Critics of a basic income mention
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the high financing costs of such a system (as each citizen, rich or poor, would receive the unconditional payment from the government), and a decline of overall productivity in connection with higher taxation rates necessary to finance the basic income scheme (Hauser, 2006). Critics reside in the general economic theory of the homo economicus, as it is argued that a basic income would reduce work incentives. It is argued that the motivation to perform any working activity is considered rather extrinsic, or: rather unpleasant but necessary to provide a certain level of consumption whereas leisure is something desirable (Gilroy, Heimann & Schopf, 2013). When taking this argumentation into consideration having an unconditional basic income complying with necessary standards of living might refrain individuals from seeking a job, if unemployed, or withdraw from the labour market, if employed. Hauser (2006) therefore expects a sharp decline in labour supply, especially among groups such as long-term unemployed, women looking after children, elder employees, and possibly young entrants of the labour market. In addition, he states that higher tax rates in connection with a basic income could possibly induce employees to leave the labour market.
As the idea of an UBI is not new, several large scale experiments have been conducted to research the effects of a guaranteed income. The United States Government sponsored 4 guaranteed income experiments between 1968 and 1980 and the Canadian government got into the game with one experiment in the late 1970’s. These experiments are known collectively as the income maintenance experiments or the guaranteed income experiments (Wilderquist, 2004). In all experiments randomly selected recipients received some form of guaranteed income the height of at least poverty line level. The main aim of these experiments was to test the effects of a guaranteed income on the work effort of these recipients, and thereby get an indication of the costs and feasibility of such a programme. While these experiments have been the subject of at least 340 scholarly articles, opinions on how the outcomes of these experiments should be interpreted vastly differ, according to Wilderquist. Many of the researchers who conducted the experiments and others who examined the data were strong backers of the programme and viewed the results as proving the feasibility of a possible UBI policy, but other as well as some politicians and members of the media, saw the results proving the very opposite. The most important reason for this disagreement is that the most general result of the experiment was what everyone expected:
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the treatment group worked less than the control group, all else equal. However, the question of how much less, and whether it was more or less than expected beforehand, was the one up for debate. Comparing the results of the five experiments is especially difficult as they differed in the levels of the guaranteed income (relative to the poverty line level) and socio-economic groups and regions.
These above mentioned field experiments are often criticized. Noguera & De Wispelaere (2006) argue that there are two distinct reasons why one might take a sceptical attitude towards these experiments in this particular contexts. First, field experiments that relate to social security are more susceptible to ‘political manipulation’, defined as ‘external interference with the research process or its outcomes for political reasons’ (p. 2). Second, the design of field experiments entails scientific limitations that impede a genuine understanding of the behavioural effect of a guaranteed income in a modern welfare state. Meaning that while field experiments can be useful, they face considerable constraints that affect both the scope of the research (i.e. the range of questions that can be studied in a single experiment) and the validity and robustness of the findings. They thus argue for the use of a laboratory experiment setting for researching UBI policy, as it offers a comparatively closed environment in which all crucial stages of the research can be ensured. Also, by using laboratory experiments, an extraordinary level of control in the research design is possible, which paves way to study behavioural responses in relation to specific aspects of the labour market, social security, the welfare system, and so on.
2.2. Labour supply and taxpayer behaviour
Even though there is no clear consensus on how an UBI should be funded –some propose increased natural resource taxes while others stress the potential of new tax instruments such as ‘Tobin taxes’ on (speculative) capital movements-, there is assumed for simplicity in this paper that an UBI will be paid directly through taxes on income. The relationship between labour supply and taxation has been researched quite extensively (Agranov & Palfrey, 2014; Gamage, Hayshi & Nakamura, 2010; Keser, Masclet & Montmarquette, 2015; Lindbeck, 1982; Ortona et al., 2008; Schroder et al., 2013; Swenson, 1988).
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Swenson (1988) was one of the first to experimentally test how individuals react to taxation. He argued that a basic proposition of supply-side economics is that taxes have a disincentive effect; that is, taxes discourage individuals from earning income. Another major proposition is that as individual income tax rates increase to some point, individuals’ work disincentives become large and their tax payments decline (i.e. the higher the tax, the less inclined individuals are to work, resulting in less tax paid). This is known as the ‘Laffer Curve’. The basic idea behind this Laffer Curve is that there exists an optimal point of taxation (from a government perspective) that maximises tax revenue. Swenson tested these propositions in a laboratory experiment in which subjects had to ‘work’ by pressing two keys on the keyboard and then hitting the return key. The higher number of hits, the higher the cash rewards. Swenson varied the tax percentage level of the payments per hit and the level of free income (tax redistributions) between treatments. Subjects could choose to ‘work’ or actively participate in leisure, provided in the form of magazines, a computer game, or a card game. The experiment shows that after-tax income needs, preferences for leisure versus work, and anticipated welfare from tax redistribution all impact on taxpayers’ earning incentives and tax payments, and thus influence the shape of the Laffer Curve. In the situation where tax collections were redistributed a net negative substitution effect occurred as subjects decreased their work efforts with increases in taxes. Labour supply (and output) began to decline at the second lowest tax rate tested in this scenario. The results also indicated that tax increases, in a setting where no public benefits were received, resulted in decreased labour supply and output. In this scenario output was also maximized at the second lowest tax rate tested. However, in higher tax levels output saw a smaller decline compared to the situation in which taxes were redistributed.
Keser et al. (2015) tested this premise in greater detail. They ran an experiment to test whether the use of the tax revenue influenced labour supply decisions. Settings were compared in which the tax revenue was not used, redistributed, or used to fund a public good (i.e. given to a charity). Keser et al. used a slightly different experimental setting than Swenson. Subjects had to decode letters into numbers, and would receive a cash reward for each decoded letter. Subjects were presented with all possible tax rates (ranging between 0 and 100 percent) and had to choose the number of letters they wished to decode for each
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of the tax rates4. By using this so-called strategy method, Keser et al. were able to determine labour supply curves for each individual. They found significant differences in both labour supply and tax revenue under each of the settings. More specifically, they find that labour supply is significantly higher when taxes are either directly redistributed or used to provide a public good, rather than ‘destroyed’.
As social security policy has two main purposes –insurance and redistribution-, it appeals to two different notions of ‘fairness’ and thus behaviour. While income redistribution makes society fairer by levelling wealth, social insurance also makes society ‘fairer’ by strengthening the link between effort and outcome by mitigating the effect of random events that can drastically impact income (Esary, Salmon & Barrileaux, 2012). Ortana et al. (2008) and Ottone & Ponzano (2011) take a slightly different approach in constructing experiments to research the behaviour of taxpayers. In both papers the effects of taxation on labour supply is examined when tax revenues are used to reduce risks involved with exerted effort. That is, subjects had to throw dice to determine how much of the income earned by performing a certain task was theirs to keep. The outcome of the throw determined whether they could keep their full earned income or would lose either half or the full amount. Between treatments, the height of these insurance payments was differed. They find that labour supply increases as long as there is a ‘welfare state’ in place which (partly) accounts for the risks, paid through taxes.
However, none of these papers have included a treatment in which there are unconditional payments to the subjects. In all cases, height of the redistributive payments depended on overall tax revenue (Keser et al. 2015), or tax revenues were used as insurance. Hence, no previous experiment has tried to research the effect of an UBI on labour supply under taxation in the laboratory. Because the idea of an UBI is not new because of its protection against economic risks (i.e. most western countries have social security programmes in place that help workers maintaining a certain income when becoming unemployed), but rather because of its unconditional redistributive purpose, the experimental design in this paper is built around this premise. There is however accounted for economic risks in the design. By using this research design, results can be used to test several things. First, it can be observed whether individuals reduce their supply of labour
4 This method is explained in greater detail in the next section as it is also used for this paper.
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when receiving an unconditional guaranteed payment. Second, it can be tested how labour supply reacts to certain increases in tax rates when there are (no) guaranteed payments. Third, results can show how optimal tax rates, from a government perspective, differ. In the next section, the full experimental design in explained in greater detail.
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3. Experimental procedure
The experiment that will be used is a real effort experiment. At the beginning of the
experiment, each participant has to decide how much effort he/she is willing to invest for each possible tax rate t ranging from zero to 100 percent in discrete five-percent steps. This use of the strategy method gives data on effort levels, contingent on all possible tax rates, for each participant. This allows for a precise measure of elasticity of labour supply to taxation. It also provides the participants with a real trade-off between work and leisure, since the participants can quit the experiment sooner if they decide to work less.
The effort tasks consist of a decoding task, which is used first by Levy-Garboua et al. (2009) and later by Charness et al. (2013) and Keser et al. (2015). This task consists of decoding letters into numbers from a table with letters in one column and corresponding numbers in another, both displayed on the computer screen. See the Appendix A below for an example of one single task and full instructions of the expeirment. This task is considered boring, and is chosen to induce sufficient disutility of effort. According to the previous mentioned papers, about 12 letters can be decoded per minute.
Each decoded letter pays €0,02 and maximum effort is solving 540 problems. Exerting maximum effort thus generates an income of €10,80 before taxes. Participants are informed they have to pay taxes for each decoded letter, which are automatically deduced from a participant’s earning. After having made effort decisions for each of the 21 potential tax rates, one of the tax rates will randomly be chosen to be actually implemented. Subjects are then requested to perform their intended effort for that tax rate. The payment for completing the decoding task for each individual is determined by:
1−π‘ππ₯πππ‘π ∗€0,02∗ππ’ππππππππππππππππ‘π‘πππ
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Subjects cannot quit the experiment until their intended tasks are completed, otherwise they will not get paid. When they have completed their tasks, subjects are asked to throw two virtual dice: if the sum of these dice is 2, they will lose their income earned by the decoding
tasks. This corresponds with a 2,78% (or 8 ) probability and is known by the participants. 9:
This risks corresponds with a general ‘economic risk’ and is used so taxes in are not only used for redistributive purposes, but also act as a sort of insurance.
The experiment will consist of two different treatments that differ in the use of the tax revenue. The first treatment is the Baseline treatment. Subjects are told that the tax revenue will be used for one main purpose: insurance of the unlucky participants. In this treatment, participants who are unlucky receive a compensation payment of π΄ = €1,50. Participants are also told that if more taxes are generated than the maximum possible insurance to be paid out by the government (i.e. π ∗ π΄ with π being the number of subjects) these will be given to a ‘public good’ in the form of a charity. There is chosen to give excess taxes to a charity to give subjects the feeling they are still paying taxes when taxes exceed the amount needed for redistribution. The charity chosen is the Environmental Defence Fund. This tax revenue threshold corresponds to the ‘government budget’ that is available to insure people affected by the economic risk.
The second treatment is the ‘UBI treatment’, where each participant receives at least a guaranteed payment of π΄ irrespective of their labour supply and their outcome after the throwing of the dice. Similar to the baseline treatment, there is a government budget of π ∗ π΄ and tax revenue surplus will be given to the charity. Subjects who are unlucky while throwing the dice will fall back to this unconditional payment π΄. Thus, the difference between treatments is the unconditional nature of the payment A. Where in the Baseline treatment only unlucky players receive this payment, in the UBI treatment all subjects, irrespective of their intended effort, receive this payment, thus increasing their initial payment.
Because there is risk and inequity involved in the decision-making, participants will be asked to make choices in two games before the main experiment. First, in a modified dictator game which tests for inequity aversion (introduced by Blanco et al. (2010)), participants are given a list of 21 pairs of payoff vectors and have to choose one of the two payoff vectors in all 21 cases. The left payoff vector is always (€0,80, €0), which gives the
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dictator €0,80 and the recipient nothing. The right payoff vector contains equal payoffs varying from (€0, €0) to (€0,80, €0,80) in discrete 4 cent steps. Hence, participants first have to choose between €0,80 for themselves and zero for the other or zero for both. Then between €0,80 for themselves and zero for the other or €0,04 for both. Thereafter between €0,80 for themselves and zero for the other or €0,08 for both, etcetera. Each participant decides as a dictator and determines the payoff of one of the other participants. One of the 21 payoff vectors is randomly chosen for actual payment. Inequality aversion corresponds to the number of equal choices out of the 21 pairs of payoff vectors (i.e. the number of times respondents chose the equal payment for both over the €0,80 for themselves and zero for the other). Second, the Holt & Laury (2002) test for risk aversion will be used to be able to control for risk aversion, where subjects have to make choices in 10 different lottery choices. The number of safe choices corresponds with the level of risk aversion. see Appendix A for the instructions of these tests.
The experiment was conducted online, coded using the PHP language and distributed through online social networks and message boards5. All subjects were either of the Dutch Nationality or currently residing in the Netherlands and were aged 16 to 61. Because the experiment was web-based, subjects were able to perform the experiment at home, behind their own computer, during any spare time they had. Thus, one could argue that using this setting, compared to an experiment in an official laboratory, subjects make a more direct trade-off between leisure and work (i.e. tasks performed in the experiment). In a traditional setting, where subjects are asked to perform tasks in an economic laboratory, subjects are often recruited with an indication of how long the experiment will last and how much (approximately) can be earned. Hence, if subjects arrive at the experiment location they might have already taken into account that they will not use the upcoming X hours for leisure. In the words of Carpenter et al. (2006), subjects ‘come to play’: they decided in advance the time to be devoted to the experiment, and behave accordingly. Also, when they quit the experiment they are still located at the experiment location. As they are likely to need some time to travel to get home, there are some ‘fixed costs’ in their leisure equations. While when subjects are at home while conducting the
5 Messages were placed in several Facebook groups to recruit subjects
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experiment, they can immediately continue with their leisure after they finish the experiment. This makes the trade-off between leisure and work more direct.
After the experiment, participants will be asked to fill in a questionnaire, in which, besides general demographics, will be asked for their political orientation; their level of trust; and if subjects agree with several statements regarding welfare, societal responsibilities, paying taxes, and an UBI.
In total, 47 subjects completed the experiment. In total 5 subjects were dropped from further analysis for one of the following reasons: inconsistent preferences in either the risk or inequity aversion tests, not (completely) answering the questionnaire after the experiment. As the randomly chosen tax rate was 70 percent, subjects were paid, on average, €2,09. Including the payments in both the inequity and risk aversion tests.