Labour supply responses to a negative income tax in Spain

Abstract

One of the major drawbacks of a Basic Income proposal is that it could induce people to reduce their labour supply. The main aim of this paper is to put forward a financially viable alternative to the current Spanish system of social protection, based on a Negative Income Tax proposal and introducing several changes in the social protection system. Using EUROMOD, the labour behavioural responses to these new conditions are studied in detail, using a structural model of labour supply.The main result is that a reform as the one described in this work will not make people to abandon the labour market, as usually argued for Basic Income proposals. Under this scheme, on the contrary, we can observe a slightly increase in labour supply. This finding has strong implications for policy. Modifying the tax-benefit system, bringing it closer to a Basic Income scheme, will produce significant improvements in inequality and poverty without a significant change in labour supply.