NOTES ON THE FINNISH BASIC INCOME EXPERIMENT

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1 NOTES ON THE FINNISH BASIC INCOME EXPERIMENT What (If Anything) Can We Learn from the Finnish Basic Income Experiment?

2 STRUCTURE OF THE PRESENTATION Why Finland is experimenting with basic income? Findings and recommendations of the research group Recommendations vs reality Summary

3 WHY FINLAND?

4 WHY FINLAND? discussion since the 1980s green-left scholars and activists the most prominent advocates an experiment proposed by a think tank Tänk in November 2014 experimental culture (i.e. evidence-based policy making) promoted by another think tank Demos Helsinki after parliamentary election in April 2015 a reference in the governmental programme of the PM Juha Sipilä (Centre Party) in May 2015 not the only social experiment, not a paradigm shift the universalist Nordic welfare regime?

5 HOW THE EXPERIMENT WAS PREPARED? a multidisciplinary consortium led by the Finnish Social Insurance Institution, Kela an assignment handed down by the Prime Minister s Office a preliminary study on 30 March 2016 (extensive research on the topic and the most essential elements of the research setting) a final report on 16 December 2016 (How to extend the experiment?) The Ministry of Social Affairs and Health AND the government responsible for the actual experiment law the experiment launched in January 2017, the benefit paid out by Kela evaluation study?

6 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 other possible models

7 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

8 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 Valtiotieteellinen social tiedekunta security net

9 THE MOST ESSENTIAL FINDINGS OF THE RESEARCH GROUP

10 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 Good idea Bad idea Very bad idea No opinion

11 DIFFERENT BUDGET-NEUTRAL BI MODELS, FLAT RATE TAXES AND EFFECTS ON INCOME DISTRIBUTION AND POVERTY (MICROSIMULATIONS BY HONKANEN & SIMANAINEN) Basic income, Flat tax rate, Povertyrate, % Gini euros/month % 0 (current system) NA

12 ESSENTIAL FINDINGS OF THE RESEARCH GROUP a budget-neutral full basic income expensive (flat rate taxes 60% 1000 BI & 79% 1500 BI) a negative income tax experiment not reliable before an access to real-time information of incomes a budget-neutral partial BI does not automatically remove the economic disincentives earnings-related benefits, housing allowances and social assistance cannot be replaced without diluting the current level of social security bureaucracy traps can be partly solved: less delays, reporting and falling through the social security net

13 Salary change PARTICIPATION TAX RATES OF A PERSON LIVING ALONE (A SIMPLE CASE) Current legislation BI 550/month & tax model Flat rate tax Current, progressive BI 750/month & tax model Flat rate tax Current, progressive No means tested benefits, but eligible for housing allowance and social assistance % 50.2% 31.8% 63.9% 38.5% % 63.6% 47.0% 74.0% 50.3% % 60.8% 45.9% 66.2% 44.2% % 58.0% 44.9% 58.3% 38.2%

14 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 % 54.4% 28.8% 60.4% 27.7% % 64.7% 43.7% 72.8% 36.6% % 81.2% 64.6% 87.8% 59.9% % 82.7% 71.2% 87.3% 65.8% % 97.8% 85.6% 102.9% 83.1% 94.6% 85.6% 84.5% 86.4% 77.8%

15 RECOMMENDATIONS OF THE RESEARCH GROUP compulsory nationwide randomisation representive and generalizable results no selection bias more intensive regional (for examining externalities) a weighted sample possible test and control groups a sample size based on power calculations to observe statistically significant results focus on low-income earners due to budget constraints exclusion of people under 25 years old

16 RECOMMENDATIONS OF THE RESEARCH GROUP a partial basic income of 550 a month as a minimum level corresponds roughly to the monthly net level of many of the basic security benefits provided by Kela would not replace earnings-related benefits, housing allowances or social assistance in an ideal test situation: different levels of basic income and tax rates

17 EXAMPLE OF AN IDEAL RESEARCH SETTING Model Basic income, EUR Tax rate A0 560 current A A B B

18 CONSTITUTIONAL PRECONDITIONS The Constitution of Finland the principle of non-discrimination might have limited the number of models did not set conditions for obligatory participation 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 The Constitutional Committee decides what and how can be tested aim of assessing reforms required for societal improvements may constitute an acceptable justification for deviating from the principle of non-discrimination

19 RECOMMENDATIONS VS REALITY OR RESEARCH VS POLITICS

20 RECOMMENDATIONS VS REALITY level recommendation different levels, min 550 experiment law 560 ~ taxation different models current, progressive population low-income households long-term unemployed (time and budget constraints) age restriction selection sample size obligatory, nationwide randomisation power calculations obligatory, nationwide randomisation 2000 (budget constraints) duration as long as possible 2 years

21 CRITICISM unrepresentative population too small sample size not a realistic model budget deficit 11 billion if implemented at a state level (general government expenditure 55.5 billion in 2017) good enough IF the first phase

22 RECOMMENDATIONS IN FINAL REPORT the study population is expanded inclusion of young persons between ages 18 and 25 should be considered an adequate sample size is determined by power calculations a sufficient budget is reserved for the experiment a tax model compatible with the basic income is introduced sufficient time is set aside for refining the study design, building new payment and taxation systems, drawing up the enabling law, and implementing the experiment smoother cooperation between different sectors of government a series of experiments

23 SUMMARY

24 SO, WHAT CAN WE LEARN? The Finnish experiment has limitations if not extended an extension in 2018 not realistic, next parliamentary elections already in 2019??? political commitment crucial before, during and after enough resources, clear targets/indicators, patience cooperation between politicians, civil servants, Tax Administration, researchers and other relevant institutions must be smooth A basic income experiment is not just an experiment! a fixed-period experiment cannot tell the universal truth about the dynamics of a basic income