The case for negative income tax with flat tax in Europe. An empirical optimal taxation exercise

TLDR: In this article, the authors present an empirical optimal taxation for a sample of European countries from three areas: Southern, Central and Northern Europe, where the tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional (means-tested) Basic Income, Unconditional Basic income, In-Work Benefits, combined with a Flat Tax above the exemption level.

Abstract: We present an exercise in empirical optimal taxation for a sample of European countries from three areas: Southern, Central and Northern Europe. For each country, we estimate a microeconometric model of labour supply for both couples and singles. A procedure that simulates the households’ choices under given tax-transfer rules is then embedded in a constrained optimization program in order to identify optimal rules under the public budget constraint. The optimality criterion is the class of Kolm's social welfare function. The tax-transfer rules considered as candidates are members of a class that includes as special cases various versions of the Negative Income Tax: Conditional (means-tested) Basic Income, Unconditional Basic Income, In-Work Benefits and General Negative Income Tax, combined with a Flat Tax above the exemption level. The analysis in most cases show that: the General Negative Income Tax strictly dominates the other rules, including the current ones; the Unconditional Basic Income policy is better than the Conditional Basic Income policy; Conditional Basic Income policy may lead to a significant reduction in labour supply and poverty-trap effects; In-Work-Benefit policy is strictly dominated by the General Negative Income Tax and by the Unconditional Basic Income.