The Consequences of Universal Basic Income

Abstract

Universal Basic Income (UBI) has gained attention in both academic and policy circles. However, its implications are not fully understood. This paper develops a general equilibrium model with uninsured income risks to examine such implications. Multiple policy alternatives are considered under both deficit-expanding and deficit-neutral structures. If the UBI policy is not financed through additional taxation, its impact on measures of inequality is unclear. The consumption and income inequality decrease while wealth inequality rises. Deficit-neutral UBIs resolve this ambiguity as the higher marginal tax rates prevent the wealth inequality from rising, which leads to a more equal distribution of consumption and income. However, the aggregate effects are amplified. The income tax must be as high as 80% of the output to keep the deficit from expanding. The interest rate rises, and the output and capital-to-output ratio sharply fall as the precautionary saving motives are weakened.Copyright© 2024 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.