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Designing a Universal Income Support Mechanism for Italy: An Exploratory Tour

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Published/Copyright: July 10, 2013
Basic Income Studies
From the journal Basic Income Studies Volume 8 Issue 1

Abstract

Italy still lacks a nationwide rationally designed mechanism of income support. In this paper, we explore the feasibility and the optimal features of a universal policy of minimum income in Italy. We use a microeconometric model and a social welfare methodology in order to evaluate various alternative mechanisms. We simulate the effects and the social welfare performance of 15 reforms resulting from three versions of five basic types of income support mechanism: guaranteed minimum income (GMI), unconditional basic income (UBI), wage subsidy (WS) and two mixed systems: GMI with WS and UBI with WS. As a welfare evaluation criterion, we adopt the Gini Social Welfare function. All the reforms are calibrated so as to preserve fiscal neutrality. The optimal policy turns out to be a version of UBI with WS, namely an unconditional transfer covering 37.5% of the Poverty Level coupled with a 10% WS, with a total average benefit amounting to about 70% of the Poverty Level.

Keywords: income support mechanisms; basic Income; guaranteed minimum income; wage subsidies; tax reforms simulation

Appendix

In this Appendix, we provide a graphical illustration of the reforms described in Section 3. On the horizontal and vertical axes, we measure respectively the pre-tax gross income and the net available income (i.e. the income attained once taxes are subtracted from and benefits are added to the gross income). Given any level of gross income, the solid line represents the corresponding level of net income.

Figure 2 represents the GMI policy. As long as the pre-tax gross income falls below G, the net available income is G, since the individual receives a transfer that covers the difference between G and the pre-tax gross income. If the pre-tax gross income is larger than G, then the individual does not receive any transfer and pays taxes on the part of income exceeding G: therefore in this case the net available income is lower than the pre-tax gross income, i.e. the solid line is below the 45° (dotted) line.

Figure 2 Guaranteed minimum income.
Figure 2

Guaranteed minimum income.

UBI is illustrated in Figure 3. Irrespective of the level of gross income, the individual receives a transfer equal to G and pays taxes on the part of income exceeding G.

Figure 3 Unconditional basic income.
Figure 3

Unconditional basic income.

With WS (Figure 4) the individual’s income is subsidized as long as it falls below G.

Figure 4 Wage subsidy.
Figure 4

Wage subsidy.

Figures 5 and 6 illustrate the mixed systems GMI and WS and UBI and WS, where with GMI and WS the individual has a GMI equal to G/2 while with UBI and WS (Figure 6), the individual receives an unconditional transfer equal to G/2. In both case, the individual income is subsidized up to G.

Figure 5 Guaranteed minimum income and wage subsidy.
Figure 5

Guaranteed minimum income and wage subsidy.

Figure 6 Unconditional basic income and wage subsidy.
Figure 6

Unconditional basic income and wage subsidy.

References

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  1. 1
  2. 2

    For more detailed and technical presentations of this exercise, see Colombino (2011a, 2011b, 2012). Examples of other recent contributions that address specific reforms are Aaberge, Colombino, and Strøm (2004), Fumagalli (2006), De Vincenti and Paladini (2009), Colombino, Locatelli, Narazani, and O’Donoghue (2010), Figari (2011) and De Luca, Rossetti, and Vuri (2012).

  3. 3

    The Poverty Level for an individual is defined here as ½ of the median of the distribution of individual incomes.

  4. 4

    A mixed system close to GMI and WS has been proposed in Italy by De Vincenti and Paladini (2009).

  5. 5

    We have also simulated the same reforms coupled with a flat tax instead of the progressive tax. However, the progressive versions in most cases perform better than the flat versions (according to the criteria to be discussed in Section 4): therefore we decided to report (in Section 5) only the result for the progressive versions of the reforms. The results of the flat versions of the reforms are available upon request from the author.

  6. 6

    The microeconometric model is similar to – although more general than – the one used in Colombino et al. (2010) and it is fully explained in Colombino (2011a, 2011b, 2012). Useful surveys of models for the design and the evaluation of taxation and social policy reforms are provided by Creedy and Kalb (2005) and Bourguignon and Spadaro (2006).

  7. 7

    EUROMOD is a tax-benefit microsimulation model for the European Union. It was originally designed by a research team under the direction of Holly Sutherland at the Department of Economics in Cambridge, UK. It is now developed and updated at the Microsimulation Unit at ISER (University of Essex, UK).

  8. 8

    More recent surveys are of course available. However, the years following 2000 envisage a more turbulent macroeconomic scenario as compared with 1998. In any case, the analysis presented in this paper is a comparative statics exercise: it concerns the evaluation and design of institutions, i.e. policies that should be assumed to stay for a relatively long period. As a counterpart, preferences should be assumed to be stable.

  9. 9

    A formal treatment of a more general class of social welfare indeces is provided by Aaberge (2007).

  10. 10

    The simulation and evaluation procedure explained above does not take into account (due to data and modelling limitations) the administrative costs of the different policies.

  11. 11

    The equilibrium simulation procedure requires us to make an assumption about the value of the elasticity of labour demand. The results reported here are those obtained under the assumption that the labour demand elasticity is equal to −1, which belongs to the range of the most common empirical estimates. The equilibrium simulation procedure assumes the simplest possible scenario, i.e. a competitive labour market. It can be extended to accommodate for different adjustment processes, e.g. union bargaining. These extensions are left for future work.

  12. 12

    The monetary figures of Table 1 can be updated to 2010 by multiplying them by 1.377.

Published Online: 2013-07-10

©2013 by Walter de Gruyter Berlin / Boston

Articles in the same Issue

  1. Masthead
  2. Masthead
  3. Research Article
  4. Designing a Universal Income Support Mechanism for Italy: An Exploratory Tour
  5. Domestic Service and Gender Equality: An Unavoidable Problem for the Feminist Debate on Basic Income
  6. Basic Income and Labour Supply: The German Case
  7. The Basic Income Grant Pilot Project in Namibia: A Critical Assessment
  8. Crisis, Cuts, Citizenship and a Basic Income: A Wicked Solution to a Wicked Problem
  9. Research Note
  10. Entitlement Reform: From Tangled Web to Safety Net
  11. Book Review
  12. The Persistence of Poverty: Why the Economics of the Well-off Can’t Help the Poor, Charles Karelis. Yale University Press, 2007, 208 p, $18 (Paperback). ISBN: 978-0-300-12090-5
  13. Self-Realization and Justice: A Liberal-Perfectionist Defense of the Right to Freedom from Employment, Julia Maskivker. New York: Routledge, 2012, pp. 170, $ 125 (Hardback). ISBN-13:978-0-415-88918-6
  14. Work after Globalization: Building Occupational Citizenship, Guy Standing. Cheltenham, UK and Northampton, MA: Edward Elgar, 2009, 366 p, (hardcover). ISBN: 978-1-848-44164-4
https://doi.org/10.1515/bis-2012-0010
Keywords for this article
income support mechanisms; basic Income; guaranteed minimum income; wage subsidies; tax reforms simulation

Articles in the same Issue

  1. Masthead
  2. Masthead
  3. Research Article
  4. Designing a Universal Income Support Mechanism for Italy: An Exploratory Tour
  5. Domestic Service and Gender Equality: An Unavoidable Problem for the Feminist Debate on Basic Income
  6. Basic Income and Labour Supply: The German Case
  7. The Basic Income Grant Pilot Project in Namibia: A Critical Assessment
  8. Crisis, Cuts, Citizenship and a Basic Income: A Wicked Solution to a Wicked Problem
  9. Research Note
  10. Entitlement Reform: From Tangled Web to Safety Net
  11. Book Review
  12. The Persistence of Poverty: Why the Economics of the Well-off Can’t Help the Poor, Charles Karelis. Yale University Press, 2007, 208 p, $18 (Paperback). ISBN: 978-0-300-12090-5
  13. Self-Realization and Justice: A Liberal-Perfectionist Defense of the Right to Freedom from Employment, Julia Maskivker. New York: Routledge, 2012, pp. 170, $ 125 (Hardback). ISBN-13:978-0-415-88918-6
  14. Work after Globalization: Building Occupational Citizenship, Guy Standing. Cheltenham, UK and Northampton, MA: Edward Elgar, 2009, 366 p, (hardcover). ISBN: 978-1-848-44164-4
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