UBI creates inflation

Negative income tax: fair alternative

Helicopter money and basic income - these two terms, which economists have long avoided, have been on the rise again since the outbreak of the corona epidemic in Germany. Rightly so, because they promise to solve three problems: a free-fall consumer climate, limited monetary policy and the inertia of the low-wage sector. With a program with a total volume of 50 billion euros, the federal government created facts under discussion during the Corona crisis in 2020: It made up to 15,000 euros available for each small company. However, the emergency aid only reaches some of those affected and some even though they are not dependent on it. Basic income and helicopter money combine the idea of ​​spending money on the population quickly, directly and unbureaucratically. Helicopter money currently often means unbureaucratic one-time transfers from the state, but earlier payments from the central bank. As a monetary policy instrument, it does not lead to an increasing tax burden or government debt. Nevertheless, helicopter money as a monetary policy measure is controversial. It is untested and the effects on inflation are difficult to predict.

The biggest problem with basic income and helicopter money is the large impact it has on distribution. It remains questionable, both between the generations and within society, whether the same sum is fair for everyone - regardless of the neediness of the recipient. Do well-off people need a consumer voucher? The financing of such measures is likely to have a greater effect than the measures themselves. If a basic income were to be financed through a consumption tax, people with a high consumption rate - for example single-parent low-wage earners - could end up being worse off with a basic income than with the basic income due to the increasing tax burden .

By adopting its measures to support solo self-employed people, politicians have signaled their willingness to provide quick help for everyone who falls through the security systems of existing institutions. At the same time, there is widespread consensus that the German social and tax system could use a simplification. A negative income tax creates social justice in times of crisis, reduces uncertainty and guarantees a basic income. Negative means that the state pays out taxes at the lower end of income instead of levying them: If the income is zero, a basic security amount is paid out. With increasing income, the income subsidy decreases until it changes from the tax-free allowance to regular taxation. The idea behind it: Even work for little money should be worthwhile. Every euro earned in addition increases the disposable income - unlike some social benefits, which are only paid up to an earnings ceiling. In practice, the negative income tax could be paid directly via the tax office, as this already has all the data relevant to income tax. If the employment ceases, it could be applied for at the beginning of the month and then paid out. If the earnings situation develops much more favorably than expected at the end of the year, taxes will have to be paid as before.

From a macroeconomic perspective, there is a decisive advantage over the established institutions: The negative income tax makes economic life more reactive and easier to plan in an emergency. Unfortunately, capacities and prices do not react flexibly enough in crises. If, for example, there is a lack of budget in the hospital to increase staff, a negative income tax would compensate for lower wages in the short term and make new hires possible. Organizers cannot instantly develop their disco into a profitable test center, and medical products from the 3D printer may be profitable in the more distant future, but initially a risky (time) investment. If their income were secure, people who suffer income losses as a result of the crisis could also help where the market does not ensure their livelihoods. That could accelerate innovation and make it easier for people to change jobs in the medium term. In the event of a possible return of a corona wave, both direct help for a hospital and the production of urgently needed goods would be very welcome.

The corona crisis shows how important quick political decisions are. Against this background, it can only make sense to have automatic mechanisms instead of knitting programs with a hot needle under pressure. A negative income tax would - like an airbag - be activated in a flash, but only in an emergency. In normal times, at best, it would only be distinguishable from today's welfare state through less bureaucracy and fairer incentives.

Jan Philipp Fritsche
German Institute for Economic Research Berlin
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