Negative income tax and universal basic income in the eyes of Aiyagari

Abstract

We compare two welfare programs: the universal basic income (UBI) and negative income tax (NIT). Under a linear income tax system, we show that (i) the NIT can replicate the allocation of the UBI exactly by providing an identical marginal effective tax schedule, and (ii) the budget of the NIT is always smaller than that of the UBI. According to our quantitative model, which is calibrated to approximate the income and wealth distributions in the United States, the optimal UBI is to pay everyone 7.2% of the average income. We also show that the NIT can achieve a similar average welfare with a much smaller budget (2.3% of the GDP) by providing a subsidy that is generous to the very poor and quickly phases out as income increases.