Working Paper
Take-up of the means-tested transfer programs in many countries is generally incomplete – that is, not all eligible individuals or households receive benefits. For example, 5 million eligible households for Earned Income Tax Credit (EITC) benefits in the US do not receive them. Given this reality, would a Universal Basic Income scheme, which features complete participation by design, be preferable? What is the role of the program participation margin along this reform? I address these questions using a standard incomplete-market life-cycle general equilibrium model augmented with a decision by households whether to take up EITC benefit. I calibrate two versions of the model, which differ in EITC's participation setup (full or incomplete), to the U.S economy and conduct two UBI-replacement reforms.
I find that the welfare effects of replacing EITC with a generous UBI as often proposed ($12,000 annually) are negative because of the large increase in tax to finance the program, which distorts agents' behaviours. Moreover, endogenous program participation amplifies negative aggregate effects. In contrast, the much smaller optimal UBI program (∼ $3500 annually) produces an overall welfare gain. The program participation margin is crucial in this normative analysis. When I evaluate the policy reform under full take-up setup, I find that no level of UBI can generate welfare gain. I conclude that the key benefit of a properly sized UBI program is in extending benefits to a broader share of the eligible population.
Population Ageing and Optimal Fiscal Progressivity (Draft Coming Soon)
