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Valtiotieteellinen tiedekunta

What (If Anything) Can We Learn from the Finnish Basic

Income Experiment?

NOTES ON THE FINNISH BASIC INCOME EXPERIMENT

31 March 2017 1

Ville-Veikko Pulkka [email protected] | Notes on the Finnish Basic Income Experiment


STRUCTURE OF THE PRESENTATION

Why Finland is experimenting with basic income?

Findings and recommendations of the research group

Recommendations vs reality

Summary

31 March 2017 2



WHY FINLAND?

31 March 2017 3



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?

31 March 2017 4



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?

31 March

2017 5 Ville-Veikko Pulkka [email protected] | Notes on the Finnish Basic Income Experiment


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

6 31 March

2017 Ville-Veikko Pulkka [email protected] | Notes on the Finnish Basic Income Experiment


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

7

31 March 2017



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 social security net 8

31 March 2017



THE MOST ESSENTIAL FINDINGS OF THE RESEARCH GROUP

31 March 2017 9



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

29.0 8.2 5.3 6.8 10.4

Good idea 40.3 26.5 29.1 24.6 18.6

Bad idea 18.5 29.5 33.3 35.2 31.2

Very bad idea

8.1 30.2 26.4 27.2 33.8

No opinion 4.1 5.6 5.9 6.2 6.0

10 31 March



DIFFERENT BUDGET-NEUTRAL BI MODELS, FLAT RATE TAXES AND EFFECTS ON INCOME DISTRIBUTION AND POVERTY (MICROSIMULATIONS BY HONKANEN & SIMANAINEN)

Basic income,

euros/month

Flat tax rate,

% Gini

Poverty-

rate, %

0 (current system) NA 26.51 13.03

450 41.5 25.94 12.29

500 43.5 25.50 11.98

550 45.0 25.15 11.74

600 46.5 24.79 11.39

650 48.5 24.33 11.10

700 50.0 23.96 10.91

750 52.0 23.49 10.47

800 53.5 23.11 10.21

11 31 March



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

12 31 March



PARTICIPATION TAX RATES OF A PERSON LIVING ALONE (A SIMPLE CASE)

Salary change

Current legislation

BI €550/month & tax model


Flat rate tax Current,

progressive Flat rate tax

Current, progressive

No means tested benefits, but eligible for housing allowance and social assistance

0 → €500 80.0% 50.2% 31.8% 63.9% 38.5%

0 → €1000 65.1% 63.6% 47.0% 74.0% 50.3%

0 → €2000 65.2% 60.8% 45.9% 66.2% 44.2%

€1000 → €2000

65.3% 58.0% 44.9% 58.3% 38.2%

13 31 March



PARTICIPATION TAX RATES OF A LONE PARENT (A DIFFICULT CASE)

Salary change

Current legislation



Flat rate tax Current Flat rate tax Current

0 → €500 29.3% 54.4% 28.8% 60.4% 27.7%

0 → €1000 42.0% 64.7% 43.7% 72.8% 36.6%

0 → €2000 70.3% 81.2% 64.6% 87.8% 59.9%

0 → €3000 78.4% 82.7% 71.2% 87.3% 65.8%

€1000 → €2000

98.7% 97.8% 85.6% 102.9% 83.1%

€2000 → €3000

94.6% 85.6% 84.5% 86.4% 77.8%

14 31 March



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

15 31 March



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

16 31 March



EXAMPLE OF AN IDEAL RESEARCH SETTING

Model Basic income, EUR Tax rate

A0 560 current

A1 560 40

A2 560 45

B1 660 43

B2 660 48

17 31 March



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

18

31 March 2017



RECOMMENDATIONS VS REALITY

OR

RESEARCH VS POLITICS

31 March 2017 19



RECOMMENDATIONS VS REALITY

recommendation experiment law

level different levels, min

€550 €560 ~ ₩670 000

taxation different models current, progressive

population low-income households long-term unemployed

(time and budget constraints)

age restriction 25–58 25–58

selection obligatory, nationwide

randomisation obligatory, nationwide

randomisation

sample size power calculations 2000 (budget constraints)

duration as long as possible 2 years

31 March 2017 20



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

31 March 2017 21



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

31 March 2017 22



SUMMARY

31 March 2017 23



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

24 31 March


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