Journal of Public Economics 223 (2023) 104881

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Journal of Public Economics

journal homepage: www.elsevier.com/locate/jpube

A quantitative evaluation of universal basic income q

Juan Carlos Conesa a, Bo Li b, Qian Li c
a
Department of Economics, Stony Brook University, USA
b
School of Economics, Peking University, China
c
Department of Economics, University of Southampton, UK

a r t i c l e i n f o a b s t r a c t

Article history: We provide a quantitative evaluation of the impact of Universal Basic Income (UBI) as an alternative to
Received 20 February 2021 the existing system of means-tested transfers. We explore varying levels of UBI generosity, paired with
Revised 17 February 2023 different strategies to finance it. All the reforms we consider result in welfare losses for a huge majority
Accepted 4 April 2023
of initial households. Moreover, these losses are increasing in UBI generosity. A reform financed with con-
Available online 15 May 2023
sumption taxes implies lower efficiency losses than reforms financed with income taxes, but fewer indi-
viduals benefit from it.
JEL classification::
Ó 2023 Elsevier B.V. All rights reserved.
E60
D52
H21

Keywords:
Incomplete market
Heterogeneous agents
Learning by doing
Consumption floor
Consumption tax
Universal basic income
Transitional dynamics

1. Introduction of UBI generosity and alternative financing schemes. We find that

The current US welfare state consists of different public pro-
grams that target different segments of the population and usually
provide transfers (cash or in-kind) that are means-tested. This
arrangement allows to target resources to those individuals most
in need, at the expense of introducing substantial distortions and
disincentives at the bottom of the income distribution (see
Moffitt (2002) or Wellschmied (2021), among others). UBI is
viewed in several political and academic circles as an alternative
to such means-tested transfers. Its universal nature eliminates
the large effective marginal tax rates at the bottom of the distribu-
tion introduced by means-tested programs, but it raises the funda-
mental question of how to pay for it and its impact on overall
economic performance. This paper contributes to this debate by
providing a thorough analysis of the implications of different levels
q
This project is supported by the High-performance Computing Platform of
Peking University and School of Economics (Peking University), and by the National
Natural Science Foundation of China (Grant No. 72103119 and Grant No.
72203005).
the costs of UBI financing vastly outweigh its benefits.
In order to perform this policy exercise, we use an overlapping
generations model where households face uninsurable idiosyn-
cratic labor productivity risk in the spirit of Huggett (1993) and
Aiyagari (1994). Households in the model choose whether to enter
the labor market, hours worked and savings, so that a system of
taxes and mean-tested transfers introduces potential distortions
in all of those margins. A major concern of UBI in the political
realm is that it might discourage labor supply and potentially dis-
rupt the accumulation of human capital. Our model incorporates
learning by doing, so that hours worked build human capital and
affect future earnings. In addition to endogenous human capital
accumulation, another crucial departure from the standard model
is the distinction between two types of consumption goods: basic
consumption goods that are subject to a minimum level of con-
sumption, and the rest of consumption goods. This feature natu-
rally introduces the notion of a basic income as a benchmark.
Our findings suggest that replacing the current welfare transfer
system with UBI results in substantial welfare losses for all levels

https://doi.org/10.1016/j.jpubeco.2023.104881
0047-2727/Ó 2023 Elsevier B.V. All rights reserved.
J.C. Conesa, B. Li and Q. Li
of generosity of UBI. Small UBI involves redistribution away from
those most needed, and more generous UBI redistributes toward
the less affluent households but results in large efficiency losses.
Financing the reform with income taxes limits the generosity of
UBI that can be supported in equilibrium. In contrast, using con-
sumption taxes the economy can support much more generous
UBI, since consumption taxes do not distort capital accumulation
and the efficiency loss is smaller. In the end, though, all reforms
imply generalized welfare losses, and these losses are increasing
in UBI generosity. In a reform financed with labor income taxes
only a handful of wealthy middle age individuals that do not work
benefit from the reform. When financed with consumption taxes
only a handful of very young, non-college, wealth poor households
experience welfare gains from the transition.
UBI is not a new idea, and it connects back to the discussion by
Friedman of a Negative Income Tax. UBI is in sharp contrast with
the current targeted welfare transfers, provoking heated debates
in policy and academic circles, for example Yang (2018),Stern
(2016) and Van Parijs and Vanderborght (2017). Hoynes and
Rothstein (2019) provide an excellent overview of different pro-
posals and pilot programs around the world, and argue that a
UBI generous enough to make a difference for the poor would be
too costly.
Our paper is closely related to a very recent strand of the liter-
ature that focuses on UBI in computational general equilibrium
models. In particular, Lopez-Daneri (2016),Luduvice (2021),
Daruich and Fernandez (2022),Guner et al. (2021), and Santos
and Rauh (2022), all provide very interesting insights into the
UBI debate. All of these papers use different theoretical frame-
works and the conclusions about the desirability of UBI are quite
mixed.
The analysis of Daruich and Fernandez (2022) builds on a gen-
eral equilibrium life-cycle model like ours, and puts a lot of empha-
sis in intergenerational linkages. They build a model where parents
endogenously decide how many resources to transfer to their off-
spring to pay for college, and UBI affects the education decisions
of young individuals. The approach of Guner et al. (2021) focuses
on household heterogeneity (singles vs married) and how welfare
programs affect such households differently. Both papers find that
switching to UBI might end up in aggregate welfare losses, consis-
tent with our results. Santos and Rauh (2022) studies the impact of
UBI in a model with frictional labor markets, and finds a more pos-
itive view on UBI. Both Lopez-Daneri (2016) and Luduvice (2021)
also find support for UBI.
In terms of the model, our exercise is probably closest to the
analysis of Luduvice (2021), even though there are several differ-
ences both in terms of the ingredients of the model, its calibration,
and in terms of the quantitative exercises proposed. In general our
contribution to the literature is that we provide a more compre-
hensive analysis in terms of UBI generosity and the strategies to
finance it.
While we evaluate and compare many different configurations
of tax/transfer schemes, we do not optimize over those. There is
a recent literature that does exactly that: Heathcote and
Tsujiyama (2021),Boar and Midrigan (2022) and Ferriere et al.
(2022) discuss to what extent unconditional transfers can be part
of the optimal tax/transfer scheme. We view our results as comple-
mentary to those.
The paper is structured as follows. Section 2 introduces the
model setup. Section 3 calibrates the model and discusses its per-
formance. The overview of the numerical experiments and its wel-
fare properties in steady state is shown in Section 4. Section 5
focuses on the impact of reforms using income taxes. In this sec-
tion, we start with steady state comparison before moving to tran-
sitional dynamics. The roles of endogenous human capital and
minimum consumption are discussed. Section 6 considers an alter-
2
Journal of Public Economics 223 (2023) 104881
native financing scheme with consumption taxes. Section 7
concludes.
2. The model of the benchmark economy
2.1. Demographics
Time is discrete and the economy is populated by J 1 overlapping
generations. In each period a continuum of new households is
born, whose mass grows at a constant rate g. Each household
works J 0 years and lives up to a maximum of J 1 years. Each house-
hold faces a positive probability of survival to next period. Let
/j ¼ Probðaliv e at j þ 1jaliv e at jÞ denote the conditional survival
probability from age j to age j þ 1. At age J 1 households die with
probability one, i.e., /J1 ¼ 0.
We denote the mass of population as
w : A  N  H  H  J ! Rþ , where A; N; H; H; J are the state spaces
for financial assets a, education level n, human capital h, labor pro-
ductivity h, and age j. Define W ~ j : A  N  H  H ! Rþ as the condi-
tional cumulative distribution function of financial asset, education
level, human capital and labor productivity for a given age
~ n;j : A  H  H ! Rþ as the conditional cumulative distribution
j; W
function of financial asset, human capital and labor productivity
for a given education level n and age j; and wj : J ! Rþ as the mar-
ginal density function of age.
2.2. Endowments
Each household enters the labor market with some given level
of education (college or non-college). After that, labor productivity
is determined by human capital (acquired by learning-by-doing)
and a stochastic component of labor productivity. Households are
endowed with one unit of time in each period. At working age,
time is divided between work and leisure; after retirement, house-
holds enjoy leisure full-time. We assume that households have no
bequest motives, but each period there are accidental bequests.
Those are distributed among the youngest cohort in a way consis-
tent with the data on financial assets of the youngest (see the cal-
ibration part for details), and the remaining bequests are equally
distributed among the surviving population.
2.3. Preferences
Households derive utility from basic consumption c1 , non-basic
consumption c2 , and experience disutility from labor supply n. We
model labor supply both on the extensive and the intensive mar-
gins. In order to do so we introduce a fixed utility cost of working
fn;j , that depends on education and age. The future utility is dis-
counted by the factor b and unconditional survival probabilities.
The objective function of a newborn household is
X
J1  
E bj Pjs¼1 /s uðc1;j ; c2;j ; nj Þ:
j¼1
The rationale for distinguishing between basic and non-basic con-
sumption goods follows Conesa et al. (2020). Targeted transfers or
UBI are intended to guarantee basic living standards. Introducing
a minimum target level of basic consumption goods makes opera-
tional the notion of minimum living standards.
2.4. Earnings
During their working age households have a labor income of
whn;j hn;j n, where w denotes the aggregate wage per efficiency unit
of labor, hn;j is human capital accumulated through learning-by-
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

doing, and hn;j is the stochastic component of labor productivity.
Importantly, both human capital accumulation and labor produc-
tivity shocks depend on education and age.
After retirement, households receive a social security benefit
penn , with a replacement ratio of bn . Notice that we are assuming
that the pension is based on households’ permanent income, which
is determined by one’s education level.
factor prices r and w; aggregate basic consumption C 1 , aggregate
non-basic consumption C 2 , aggregate capital K, and aggregate labor
L; and a measure w : A  N  H  E  J ! Rþ , a conditional cumula-
~ j : A  N  H  E ! Rþ ; a
tive distribution function for a given age W
conditional cumulative distribution function for a given ability and
~ n;j : A  N  H ! Rþ , and a marginal density function of age
age W
wj : J ! Rþ such that:

2.5. Learning-by-Doing 1. Given prices and tax policies, fV; c1 ; c2 ; a0; h0; ng solve the house-
holds’ maximization problem:
UBI affects labor supply on the extensive and the intensive mar-
gins, which affects not only the current period income but also Vða; n; h; h; jÞ ¼ max uðc1 ; c2 ; nÞ þ b/jþ1 EVða0; n; h0; h0; j þ 1Þ
fc1 ;c2 ;a0;h0;ng
future earnings. This dynamic impact works through the human 
ð1 þ rÞða þ bÞ þ yearn  Tax  ss þ trða; n; h; h; jÞ; j 6 J 0
capital accumulation. Following the evidence provided by Cossa s:t:c1 þ c2 þ a0 ¼
ð1 þ rÞða þ bÞ þ yearn  Tax þ trða; n; h; h; jÞ; j > J0
et al. (2002), we model human capital as an endogenous process (
whh n;j n; j 6 J 0
accumulated through learning-by-doing. Specifically, we assume: yearn ¼
penn ; j > J0
ah1 ah2 
h0 ¼ Ahn;j h n þ ð1  dh Þh sa rða þ bÞ þ T ðyearn  0:5ssÞ þ sc2 c2 ; j 6 J0
Tax ¼
sa rða þ bÞ þ T ðyearn Þ þ sc2 c2 ; j > J0
where dh is the depreciation rate of human capital, Ahn;j is the educa- ss ¼ sss minfyearn ; y g
a
tion and age dependent efficiency in producing human capital. h0 ¼ Ahn;j h h1 nah2 þ ð1  dh Þh
Finally, ah1 and ah2 determine the impact of current human capital c1 ; c2 > 0; a0 P 0; a0 given; 0 < h < 1
and labor supply on next period human capital.
2. Production factors are paid their net marginal returns:
2.6. Production r ¼ F K ðK; LÞ  d
w ¼ F L ðK; LÞ
There is a representative firm renting capital K and efficiency
units of labor L to produce output Y, which is used for basic con- 3. Market clearing and feasibility:
sumption C 1 , non-basic consumption C 2 , capital investment I, as (a) The goods market clears:
well as government consumption G. Firms behave as price takers
C 1 þ C 2 þ K0  ð1  dÞK þ G ¼ FðK; LÞ
in input markets so that capital and labor are paid their net mar-
ginal products. The law of motion of capital accumulation is XJ1
R
C1 ¼ wj ANHH c1 dW~ j ða; n; h; hÞ
K0 ¼ ð1  dÞK þ I, where the depreciation rate of capital is denoted j¼1
by d.
X
J1
R
C2 ¼ ~ j ða; n; h; hÞ
wj ANHH c2 dW
2.7. Welfare transfers and fiscal policy j¼1

(b) The capital market clears:

Each period, households receive welfare transfers from the gov-
ernment. These welfare transfers are means-tested, and we classify X
J1 Z
K¼ wj ~ j ða; n; h; hÞ;
ða þ bÞ dW
them into three different groups depending on the requirements
j¼1 ANHH
needed to qualify for them in terms of assets and income thresh-
olds. The government collects revenue from labor income through where bequest b is defined as:
a progressive tax schedule, linear taxes on capital income, and the Z
taxation of consumption of non-basic goods. Following the evi- b þ w1 ~ 1 ða; n; h; hÞ
a dW
dence, we assume that basic consumption goods are tax exempt. ANHH

In addition, working households make contributions to social X

J1 Z
¼ wj ð1  /j Þ ~ j ða; n; h; hÞ=ð1 þ gÞ
a0 dW
security that are proportional to their labor income (up to a cap),
j¼1 ANHH
and half of these contributions are tax deductible. Government
outlays consist of an exogenously given level of government con- (c) The labor market clears:
sumption and the rest is used to pay for welfare transfers. Z
X
J1
Throughout the paper, we assume that the social security system
L¼ wj ~ j ða; n; h; hÞ
hhn;j n dW
is self-financed. j¼1 ANHH

2.8. Equilibrium 4. Fiscal policy is such that:

(a) The government general budget constraint is satisfied:
Definition: Given an exogenous government policy, a stationary X
J1 Z
equilibrium is a household value function Vða; n; h; h; jÞ wj ~ j ða; n; h; hÞ
Tax dW
ANHH
and its associated decision rules c1 ða; n; h; h; jÞ; c2 ða; n; h; h; jÞ; j¼1

a0ða; n; h; h; jÞ; hða; n; h; h; jÞ and nða; n; h; h; jÞ; taxes paid to the gov- X
J1 Z
¼ wj ~ j ða; n; h; hÞ þ G
tr dW
ernment Taxða; n; h; h; jÞ, social security tax ssða; n; h; h; jÞ, welfare
j¼1 ANHH
transfer received trða; n; h; h; jÞ and social security benefits penn ;

3
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

(b) The social security budget constraint is satisfied:

X
J0
R
bn w wj ~ ða;n;h;hÞ
hn;j hn;j n dW
AHH n;j
j¼1
penn ¼
XJ0
R
wj ~ ða;n;h;hÞ
dW n;j
AHH
j¼1

X
J1
R X
J0
R
penn wj ~ n;j ða; n; h; hÞ ¼ sss w
dW wj ~ n;j ða; n; h; hÞ
hn;j hn;j n dW
AHH AHH
j¼J 0 þ1 j¼1

5. The measure over the state space evolves according to the

Markovian transition matrix:

wða0; n; h0; h0; j þ 1Þ ¼ /j wða; n; h; h; jÞPn;j ðh; h0Þ1a0 ða; n; h; h; jÞ

wða; n; h; h; 1Þis exogenously given

where 1ðÞ is an indicator function that takes value 1 if

a0 ¼ a0ða; n; h; h; jÞ and 0 otherwise. Finally, h0 is the one resulting
from using the policy function for labor in the human capital
accumulation equation.
Fig. 1. Conditional survival probability, interpolated, in%. The conditional survival
probabilities /j are obtained from Bell and Miller (2005).We interpolate the
3. Calibration and model validation conditional survival probabilities at each age, then multiply the consecutive two
years as the conditional survival probability of our model .time interval..
This section presents the calibration strategy and model valida-
tion. One period in the model is the equivalent of two natural
years. The reason for doing so is to make sure that the sample size
for the estimation of productivity processes is sufficiently large
(see Section 3.5). Some parameters are determined exogenously,
while others are jointly calibrated in equilibrium to match the
data.

3.1. Demographics

The annual population growth rate is set to 0.63 percent. The

conditional survival probabilities /j are obtained from Bell and
Miller (2005), that provides conditional cohort probabilities of sur-
vival at age 0, 30, 60, 65, 75 and 100. We interpolate the condi-
tional survival probabilities at each age, then multiply the
consecutive two years as the conditional survival probability of
our model time interval, Fig. 1 shows the interpolated probabilities
that we use in the model.

3.2. The definition of basic consumption: Expenditure patterns in the

CEX Fig. 2. Share of C 1 and C 2 in total C by pre-tax income quintile, in %. Shares of basic
goods and non-basic goods by pre-tax income quintile are computed from CEX
In order to distinguish between basic goods and non-basic 2017 data..
goods we follow Conesa et al. (2020). The consumer unit is one
household, and we use CEX 2017 data to obtain the expenditure
profiles according to income. We consider basic goods those cate- 3.3. Preferences
gories for which their share in total consumption decreases with
income. Based on this criterion we label as basic goods food at The utility function is given by:
home, rent, utility, prescription medicine and television. We also
8 
include health insurance and medical services as basic goods.1 > c 1c 1r
< 1 Þ12r
1
> c c c 1þv
þ B ð1nÞ1  fn;j if n > 0
Notice that there is a substantial overlap between those categories 1þv
and the goods that are usually subject to reduced consumption tax uðc1 ; c2 ; nÞ ¼  1r
>
>
: c1 cÞ c1
c c
rates or even exempt from taxation. All other expenditure categories 2
þB if n ¼ 0
1r
are labeled as non-basic consumption goods.
Fig. 2 shows the relationship between expenditure shares and
income. Examples of non-basic and basic consumption, as well as We set r equal to 2. The parameter c governs the share of basic con-
their share in total consumption can be found in Conesa et al. sumption in total consumption. Under the assumption that the
(2020). minimum consumption c is irrelevant for households at the top of
the income distribution, c is the share of basic consumption in total
1
A large number of papers find that bad health is a big obstacle to participation in
consumption at the top of the income distribution, which is 0.21.
labor and financial markets, and eventually leads to low income. See De Nardi et al. The minimum consumption c ¼ 0:23 is chosen to target the ratio
(2022),Currie and Madrian (1999), Poterba et al. (2017) and De Nardi et al. (2010). of aggregate C 1 =C 2 ¼ 0:5.
4
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Following Erosa et al. (2016), we choose v ¼ 0:5 as the Frisch

elasticity of leisure. Parameter B is calibrated such that average
hours worked are one third of available time.
Finally, the fixed cost of supplying labor is reflected by an age-
and education-dependent parameter fn;j , calibrated to match the
employment rate for each age and education group.
Fig. 3 presents the calibrated fixed cost of working over the life
cycle by educational group. Generally speaking and consistent with
the literature, low skilled and young workers are subject to higher
fixed cost of working.

3.4. Labor productivity shocks

We use PSID data from 1969 to 2017 to form a household panel

at two-year intervals.2 Basically, we keep in the sample households
that: 1. are in the non-immigration sample; 2. whose head is
between 21 and 65 years old; 3. whose head’s annual hours worked
are above 260 h; 4. whose earnings are not completely from self-
employment; 5. whose wage rate (household total earning over total
hours worked) is above one half of the minimum wage rate. We split
the sample into two ability levels: non-college and college graduates
(throughout the paper, we use ‘‘low skilled” and ‘‘high skilled”
exchangeably with ‘‘non-college” and ‘‘college graduates”).
In the spirit of De Nardi et al. (2019), our procedure is to com-
pute age-education dependent Markov processes that impose no
constraints on the stochastic properties of the shocks. In particular,
our parameterization allows for the type of deviations from log-
normality emphasized in Guvenen et al. (2019).
After removing the life-cycle profiles by regressing logarithm
wage rate on age, age squared and cohort dummies for both edu-
cation levels respectively, the residuals are used for constructing
the idiosyncratic labor shock. For each education and age group,
we categorize households by residual size into 11 bins, corre-
sponding to the percentiles of the Lorenz curve of the distribution
of residuals. The age and education-dependent realization of the
shock h takes the median value for each group. We compute age-
education dependent transitions as the probability of a household
moving from one percentile group this period to another group
next period. We use ordered probit regressions to estimate those
probabilities.
3.5. The initial distribution of assets, education and labor shocks
We assume a non-trivial initial distribution over assets, educa-
tion and labor productivity shocks. The rationale for introducing
this additional source of heterogeneity is to match the life-cycle
profiles of employment rates from the data by discouraging some
young households from working. Otherwise, if all individuals enter
the economy with zero asset (the standard assumption), the
youngest cohorts would always work no matter how low produc-
tivity is or how high the fixed costs of working are. This happens in
our specification because transfers (as taken from the data) are not
generous enough to cover the minimum consumption level.
We focus on the two levels of education and the 11 labor shock
bins at age 21–22, and take their corresponding assets directly
from the data as the assets initially assigned to each household.
Thus, we form a distribution over assets, education and labor
shocks. Table 1 shows the distribution of initial assets by skill level
in the data. Half of the non-college households and one-third of the
college households enter the economy with less than $1,000. At the
same time, over one-tenth of the college households possess an
endowment over $60,000. Table 2 shows the monetary amount
of initial assets by education and productivity. College households
2
Conesa et al. (2020) gives a more detailed description of the data treatment.
5
Fig. 3. Fixed cost of working. This figure plots the fixed cost of working as calibrated
to match employment rate for each age and education group. Employment rates for
different groups are calculated from PSID 2017 data..
have an initial endowment roughly twice the size as that of the
non-college. The average initial assets of the young cohort are
$13; 867.
Once we introduce in the model this non-trivial initial distribu-
tion of wealth, we can calibrate age-specific fixed costs of working
that generate life-cycle employment rates by educational group
that are consistent with the data.
3.6. Human capital accumulation
We calibrate the effectiveness of human capital accumulation,
Ahn;j , for each education and age group, such that the life-cycle
deterministic earnings profile in the model matches that of the
data.
Chang et al. (2002) use Bayesian estimation to calculate the
effectiveness of current human capital and labor supply in produc-
ing next period’s human capital to be 0.41 and 0.33 annually. Fol-
lowing the procedure they proposed in the appendix, we convert
the parameters to two-year periods, ah1 ¼ 0:16 and ah2 ¼ 0:46.
The depreciation rate of human capital takes the value of 0.06 fol-
lowing Huggett (2011).
3.7. Technology
The aggregate production function is assumed to be Cobb-
Douglas, with a capital income share of 0.36. The depreciation rate
of capital is set at 0.12 (for a two year period), to match investment
ratios in the steady state of the benchmark economy to the average
in the data.
3.8. Fiscal policy in the benchmark economy
3.8.1. Consumption Taxation
Following Conesa et al. (2020), we assume the tax on basic con-
sumption is 0, sc1 ¼ 0. The tax on nonbasic consumption, sc2 , is set
to 0.076 to match the revenues collected from sales taxes in the
data, roughly 3% of GDP.
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Table 1
Density over initial assets, in %.

Asset level < $1000 $1; 000- $5; 000- $10; 000- $30; 000- $60; 000- > $200; 000
$5; 000 $10; 000 $30; 000 $60; 000 $200; 000
Non-college 49.37 20.43 7.59 9.54 8.21 4.85 0.01
College 35.62 11.25 17.33 8.88 15.49 11.43 0
Total 45.25 17.67 10.51 9.34 10.39 6.82 0

This table shows the distribution of initial assets by skill levels. The density over initial assets is computed from the PSID 2017 data.

Table 2
Initial assets by labor productivity, in $

h h1 h2 h3 h4 h5 h6 h7 h8 h9 h10 h11 Average

Non-college 1,318 1,831 5,295 8,263 7,314 10,875 16,204 25,256 7,885 640 1,419 11,017
College 6,941 9,486 4,329 4,588 18,387 14,941 46,281 26,362 11,657 4,801 2,193 20,518
Average 3,004 4,127 5,005 7,160 10,636 12,094 25,227 25,587 9,016 1,888 1,651 13,867

This table shows the monetary amount of initial assets by education and productivity. We compute levels of average asset for 11 labor shock bins and two education levels
from PSID 2017 data.

3.8.2. Income Taxation 3.8.3. Welfare transfer programs

We assume that the capital income tax is proportional to net
earnings from wealth, with a marginal tax rate of sa ¼ 0:396 (see
Domeij and Heathcote (2004)). The labor income tax follows
Heathcote et al. (2017) and takes the form:
1sl
Tðyearn Þ ¼ yearn  kðyearn Þ
where yearn is labor earnings, and the parameter sl determines the
degree of progressivity of the tax system.
The evidence in the literature finds that the log of post-
government income is approximately a linear function of the log
of pre-government income. The pre-government income includes
all market income and social insurance benefits, and post govern-
ment income is defined as pre-government income after taxes and
transfers. In contrast, in our model the tax function applies only to
pre-tax labor earnings.
We use the TAXSIM calculator version 25 provided by NBER to
derive tax liabilities for each PSID 2017 household. TAXSIM enables
us to construct taxes and transfers that are in line with family char-
acteristics, such as residency state, marital status, age of depen-
dents, etc. In terms of income we include only the labor related
components that align with our model choice: Wages for primary
taxpayers and spouses (if applicable), self-employment income,
taxable Pensions and IRA distributions, gross social security bene-
fits, while omitting income generated from capital or social insur-
ance benefits such as unemployment insurance.
After obtaining TAXSIM tax estimates, we follow Heathcote
et al. (2017) and regress the logarithm of post-tax labor earnings
(earnings net of tax) on pre-tax labor earnings. The highly linear
relationship between the two variables yields a slope of sl ¼ 0:1.
In order to validate the methodology we have used to obtain this
estimate, we again use TAXSIM to compute the total tax and trans-
fer (except for Medicaid) from total income (labor and capital
income and social insurance benefits) as in Heathcote et al.
(2017). Due to the exclusion of Medicaid, which takes up half of
social welfare transfers, our estimates yield a less progressive
tax-transfer scheme than that in the literature. Indeed, we obtain
a progressivity parameter of sl ¼ 0:12, whereas the average pro-
gressivity is around 0.15 (Guner et al. (2014),Holter et al. (2019)
and Wu (2021)) and 0.18 in Heathcote et al. (2017)). Our exercise
confirms the intuition that excluding transfers results in a less pro-
gressive tax schedule. That is exactly what we find, confirming that
our estimate of sl ¼ 0:1 seems like a sensible estimate of the pro-
gressivity of the labor income tax schedule. Finally, k ¼ 0:98 is cal-
ibrated to match a ratio of government consumption to GDP of
20%.
The government provides a variety of means-tested welfare
programs to help families with low income and protect them
against economic hardship. The Congressional Research Service
(CRS) identifies 83 overlapping federal welfare programs, classified
into ten categories: cash assistance, medical, food, housing, energy
and utilities, education, training, services, child care and child
development, and community development. Differently than the
assumptions in Conesa et al. (2020) we distinguish here between
EITC, Unemployment Insurance, and all the other transfers. The
reason to do so is that the first two are specifically a function of
labor market status. Table 3 reports the share of major welfare
transfers in total federal outlays, constructed from the Historical
Tables of the White House Office of Management and Budget.
Averaging over 1997 to 2015, the largest welfare programs are:
1. Unemployment Insurance (UI, 1:8%); 2. Supplemental Nutrition
Assistance Program (SNAP, 1:6%); 3. Housing Assistance (1:5%); 4.
Earned Income Tax Credit (EITC 1:5%); 5. Supplemental Security
Income (SSI, 1:4%); 6. Temporary Assistance for Needy Families
(TANF, 0:8%); 7. Children’s Nutrition Program (0:5%); 8. Child
Tax Credit (0:5%); 9. Women, Infants, and Children (WIC, 0:2%);
10. Children’s Health Insurance Program (CHIP, 0:2%); 11. Low
Income Home Energy Assistance (LIHEA, 0:1%). Adding up, the
total share of these welfare programs in federal outlays is 10.0
percent.
We recover the distribution of overall welfare transfers from
multiple datasets, including PSID and CEX. PSID is a thorough sur-
vey on households’ income sources and it keeps records on welfare
transfers, like TANF, SSI, energy assistance, unemployment com-
pensation, etc. Unfortunately, PSID does not included tax credits
and Medicaid, so we obtain information about EITC and child tax
credit from CEX. As with the CEX, we only include households from
PSID whose head of household is between 21 and 65 years old and
belongs to the labor force, having hours worked exceeding 260 h
per year, as well as the household wage rate being more than half
of the minimum wage.
Notice that we use different data sources, and there are differ-
ences in data samples, survey frequency and survey questions.
Because of that the data is not directly comparable across these
data sources. We adhere to PSID earnings’ data for its thorough-
ness, and interpolate EITC and child tax credits in CEX to PSID earn-
ings level. The details regarding the data and the interpolation
algorithm are discussed in Conesa et al. (2020).
Because all these welfare programs are means-tested, requiring
income and/or asset tests, the families at the bottom of the income
distribution do not necessarily receive the highest transfers. For

6
J.C. Conesa, B. Li and Q. Li
Table 3
Major welfare transfers as a fraction of government outlays, averaging between 1997 and 2016, in %.
UI SNAP TANF SSI EITC
1.85 1.56 0.80 1.41 1.47
This table shows the share of major welfare transfers in total outlays. We list the largest 10 welfare transfers. The shares are calculated from the White House Office of
Management and Budget Historical Tables.
example, only $453 of EITC transfers go to the bottom 1 percent
due to the fact that many of these households do not have a job,
whereas households with slightly more income at the bottom
1  5% are the biggest recipients of EITC. Overall, the welfare
transfers decline with income. The average welfare transfer is
roughly $2; 500, with households whose income is at 1  5%
receiving the most.
As discussed above, we split welfare transfers into EITC, UI and
other transfers, with the first two being conditional on employ-
ment. For each category, we choose a piece-wise linear function
to describe the welfare transfers as a function of income. That is:
!
X
I fare programs might compare to UBI depending on a finer set of
eitc ¼ veitc 1a6a;‘>0 leitc
i 1y2income groupi
i¼1
!
X
I
ui ¼ vui 1a6a;‘¼0 luii 1y2income groupi
i¼1
!
X
I
other ¼ voth 1a6a loth
i 1y2income groupi
i¼1
where 1 is an indicator that takes value 1 if the criterion is satisfied,
y denotes income, eitc is the amount of EITC transfers, ui for unem-
ployment benefit, other refers to other transfers. Income groups are
categorized according to its relative size to average income. leitc
i tion strategy and some others are not and can therefore be used
the EITC receipts by income group i relative to the average. Fig. 4
presents each transfer receipts relative to the average.
For instance, consider a household in income group i, that is
working and satisfies the asset test, then the EITC payments are
leitc
i times the average EITC. Parameter veitc is a common factor
for all households, and it is basically to rescale the total EITC
receipts in the model to be the same level as in the data. UI and
other transfers are also distributed according to the same logic.
In addition, in the welfare function, 1a6a;h is an indicator for
asset and employment test. For the welfare programs we consider,
SNAP (in most states), SSI and TANF are subject to an asset tests,
whereas the rest of the programs are not.3 Usually when a welfare
program is subject to an asset test, assets are split into two cate-
gories: uncountable and countable assets. Uncountable assets refer
to the ones that are not considered for the eligibility of a specific pro-
gram and are considered as ‘‘exempted”. For example, the assets that
are exempted include: 1. The first $2; 000 of bank accounts and cash;
2. Funeral and burial funds; 3. Insurance policies below $1; 500 (this
amount varies by state); 3. Primary home below $595; 000 in most
states,and up to $893; 000 in some states; 5. Vehicles. Other asset
tested programs share similar criteria.
Because we do not distinguish between financial assets and real
estate in our model, we set the asset limit for the overall welfare
transfer programs to be $600; 000, nearly ten times GDP per capita.
A limitation of our analysis is that we are mapping different
welfare programs into crude means-tested transfer schemes. This
is the result of having in the model a necessarily limited set of
household characteristics, so that by construction our model dis-
plays a lot less sources of heterogeneity than in the data. For exam-
ple, many programs might target specific features such as
3
See Wellschmied (2021) for a thorough investigation.
Journal of Public Economics 223 (2023) 104881
HA CTC CNSM CHI WIC LIHEA Average
1.49 0.44 0.51 0.19 0.20 0.09 10.02
household composition, number and age of dependents, geo-
graphic location, labor market histories, health histories, etc.
Take the example of Unemployment Insurance. In the model
every household not working with assets less than $600,000 qual-
ifies for UI. In the data only a subset of these households qualify,
and moreover payments further differ depending on the history
of previous labor earnings and are limited in time. So, even though
we match by construction total UI expenditures and their distribu-
tion in the income/wealth dimension, their distribution across
households is bound to differ significantly from its empirical coun-
terpart in ways we can’t even start to think about. The same
applies to most other transfers. The extent to which specific wel-
household characteristics is beyond the scope of this paper.
Table 4 and Table 5 report all of the parameters in the model,
chosen as discussed above:
3.9. Model implications and aggregate distributions
Given those parameter values we compute the equilibrium in
the benchmark economy. Now we turn to the comparison of the
benchmark economy to the data along several relevant dimen-
sions. Some of these features are directly targeted in our calibra-
is
to evaluate model performance.
Fig. 5 presents basic consumption C 1 as a proportion of aggre-
gate consumption C for all income levels. The model generates a
pattern of C 1 =C as a function of income that is comparable with
the data. Notice that we did not target this expenditure profile
since we matched the average. The model captures well the
decreasing shares of basic goods in total consumption as a function
of income.
Fig. 6 compares the model employment rates across age and
education groups with those in the data. The match between data
and model outcomes is not surprising given that we are targeting
those in our calibration exercise. Given the age- and education-
dependent parameters, employment rates match the data fairly
well provided that we feed in the model the initial assets distribu-
tion of the data (see the discussion in SubSection 3.6).
An important feature of our model is the function that governs
human capital accumulation. In the calibration, we determine the
efficiency in producing human capital for each age and education
level, such that the model life-cycle hourly earnings profile
matches the average profile of hourly wages in the data. Fig. 7
shows that the wage profile in the calibrated economy matches
the data quite well. Here, the age profile in the data, as explained
in Section 3.4, is obtained by regressing the logarithm of the wage
rate on age, age squared and cohort dummies for both education
levels separately.
In order to assess the distributional properties of the model, we
compare the distributions of earnings, wealth, income, consump-
tion and hours worked in the model to the data in Table 6. Table 7
shows the distribution of employment and fiscal variables condi-
tional on income of the model versus the data. Of these variables,
only the distribution of EITC transfer, UI transfer and other welfare
transfers are directly targeted through calibration. Of course, the
7
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Fig. 4. Relative welfare transfer. This figure shows the payments relative to the average by income group for each transfer. In panel (a), a household in income group i and
eligible for EITC will receive the average EITC times leitc
i . Panel (b) and Panel (c) report the same for UI and other welfare transfers.

Table 4 Table 5
Parameters. Parameters.

Parameter Targets Values Technology

Demographics a Capital income share 0.36
g Annual population growth rate 0:63% d Depreciation rate of capital 0.12
/j Conditional survival probability see text Fiscal policy
Preferences sa Tax rate on capital income 0.39
b K=Y ¼ 3 annually 0.99 k G=Y ¼ 0:2 0.92
r CRRA parameter 2.00 sl Progressivity of labor income tax 0.10
c C 1 =C 2 at top income percentile 0.21 sc1 Tax rate on basic consumption 0.00
c Average C 1 =C 2 ¼ 0:5 0.23 sc2 Tax rate on non-basic consumption 0.076
B Average hours worked = 0.33 1.30 sss Social security tax 0.13
n Elasticity of leisure 0.50 earn
y Ratio of social security tax cap to average earnings 2.46
fn;j fixed cost of working see text b Replacement ratio for self-financed SS system 0.60
Human capital Welfare transfers
Ahn;j TFP of producing human capital see text leitc
i
EITC receipt relative to average see text

ah1 Effectiveness of current human capital 0.16 luii UI receipt relative to average see text
ah2 Effectiveness of labor supply 0.46 lother
i
Others receipt relative to average see text
dh Annual human capital depreciation 0.06 veitc Rescale factor of EITC 1.52
vui Rescale factor of UI 1.49
This table reports the parameters in the benchmark model.
vother Rescale factor of others 0.71
Initial distribution see text
Labor shock see text
welfare transfers match the data almost perfectly, given the piece-
wise linear function we assumed for the transfer functions. This table reports the parameters in the benchmark model.

8
J.C. Conesa, B. Li and Q. Li
Fig. 5. Data vs Model: C 1 as percentage of total consumption by income quintile, in
%. This figure compares basic consumption C 1 as a proportion of aggregate
consumption C for all income levels in the model (red) to that in the data (blue).
(For interpretation of the references to colour in this figure legend, the reader is
referred to the web version of this article.)
The model generates a distribution of earnings that matches
fairly well with the data, except that the Gini of earnings is slightly
larger in the model, because the concentration of earnings at the
top is a bit higher in the model than in the data. Notice that, while
we target the age-profile of employment rates, we do not directly
target the distribution of earnings.
However, the model falls short of matching the distribution of
wealth. Typically this kind of model does not generate as much
concentration of wealth at the top as in the data. As a result the
model generates a lower concentration of consumption and tax
burdens as well, especially at the top of the distribution. Notice
that we have used top-coded PSID data to construct our measures
of labor productivity and that we have abstracted from self-
employment. While the model performs well relative to the earn-
ings distribution as measured in the PSID, it falls short of account-
ing for the wealth distribution as measured in the CPS. This type of
Fig. 6. Employment rate. This figure plots the employment rate by age and education. Panel (a) compares the employment rates over the life-cycle for the non-college group
(red line) with those in the data (blue). Panel (b) presents a similar comparison for the college group. (For interpretation of the references to colour in this figure legend, the
reader is referred to the web version of this article.)
9
Journal of Public Economics 223 (2023) 104881
model can generate much larger wealth inequality by introducing
super-star productivity realizations as in Kindermann and Krueger
(2022), explicitly modeling entrepreneurship as in Quadrini
(2009), or modeling bequests as in De Nardi (2004).
In what follows we will discuss the implications of a series of
counterfactual experiments in order to evaluate the desirability
of UBI.
4. Overview of welfare implications
This section briefly discusses the steady state welfare implica-
tions of the different policies. The welfare criterion is the ex-ante
expected utility of newborns. We take a look at both college and
non-college households, and their average. In the next section we
will discuss in more detail the implications of selected policies
and the associated transitional dynamics.
The exercises we perform replace all targeted transfers with
UBI. We allow for different generosity of the UBI system as well
as an experiment with no UBI, and explore alternative ways to
finance it. Here we list four different financing schemes, consisting
of different combinations of capital income tax, labor income tax
and proportional consumption taxes. Notice that we remove all
existing transfers throughout the experiments, but we leave
unchanged all social security taxes and benefits. In all our compu-
tational experiments we keep the initial assets of the first age
cohort at the same level as that in the benchmark economy.
The steady state results are summarized in Fig. 8. It reports the
welfare gains (in consumption equivalent units) of different levels
of UBI under different financing arrangements relative to the
benchmark economy.
The first thing to notice is that the magnitude of UBI that can be
sustained in equilibrium depends drastically on the tool used to
finance it. If we use capital income taxes alone, only very small
levels of UBI are sustainable (below $4,500). In contrast, with labor
income taxes (or a broader flat income tax) it is possible to sustain
UBI transfers up to around $22,400. Finally, with consumption
taxes it is possible to sustain much larger levels of UBI, being in
excess of $40,000 per household.
Non-college newborns experience a welfare loss with the elim-
ination of targeted transfers. In contrast, this reform can benefit
college newborns if there is no UBI or if it is small enough (below
$4,500). However, more generous UBI financed with income taxes
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Fig. 7. Wage profile. This figure plots the wage profiles over the life-cycle. Panel (a) compares the wage profile in the model (red) with that in the data (blue) for the non-
college group. Panel (b) presents a similar comparison for the college group. (For interpretation of the references to colour in this figure legend, the reader is referred to the
web version of this article.)

Table 6
Data vs model: Distribution of earning, consumption and welfare transfers.

Gini Bottom% quintile Top%

1 ½1; 5 ½6; 10 Q1 Q2 Q3 Q4 Q5 ½91; 95 ½96; 99 ½99; 100
Earnings
Data 0.48 0.00 0.00 0.00 0.06 9.28 18.20 25.04 47.41 11.00 11.85 9.11
Model 0.50 0.00 0.00 0.00 0.18 8.72 16.63 24.43 50.02 12.22 13.95 8.13
Wealth
Data 0.78 0.22 0.04 0.00 0.22 1.33 5.25 13.45 80.19 14.11 25.67 25.79
Model 0.60 0.00 0.00 0.11 0.96 5.49 10.37 24.36 58.83 14.43 15.93 6.98
Income
Data 0.48 0.00 0.01 0.18 1.78 8.30 14.82 25.52 49.58 11.41 12.69 7.39
Model 0.45 0.03 0.30 0.85 4.32 10.74 14.87 22.10 47.96 11.25 13.41 6.86
Basic Consumption C 1
Data 0.25 0.25 1.46 2.35 9.72 14.29 18.02 22.58 35.38 8.69 8.90 3.49
Model 0.16 0.61 2.72 3.64 12.86 17.49 19.30 21.46 29.89 7.70 6.14 1.98
Non-basic consumption C 2
Data 0.40 0.06 0.62 1.15 4.98 10.18 15.96 23.64 45.25 11.08 12.07 4.99
Model 0.28 0.32 1.76 2.62 7.01 14.61 18.78 22.55 37.05 7.97 7.74 2.71
Hours worked
Data 0.31 0.00 0.00 0.00 0.85 17.70 23.73 24.29 33.43 8.65 7.85 3.32
Benchmark 0.31 0.00 0.00 0.00 0.39 16.81 23.05 27.22 32.52 8.57 6.86 1.89

This table compares the distribution of earnings, wealth, income, basic consumption, non-basic consumption and hours worked in the model with those in the data.

implies larger distortions, and both types of newborns end up
experiencing welfare losses relative to the benchmark. Overall, it
is fair to say that substituting UBI for targeted transfers is not a
good policy.
In fact, it is possible to do a bit better by switching to propor-
tional income taxes (labeled as ”with income tax” in Fig. 8), but
that is a statement about the distortionary implications of different
tax systems, and not about the desirability of UBI relative to tar-
geted transfers. In contrast, if UBI is financed by consumption
taxes, capital accumulation is not distorted. As a consequence
more generous UBI is sustainable, and the welfare consequences
are also affected. When we leave income taxes unchanged and
use consumption taxes to balance the budget, the welfare gains
are increasing in UBI generosity for non-college newborns and
decreasing for college ones. When UBI is small college newborns
benefit and non-college ones loose, and the other way around for
more generous UBI.
Notice that we are studying policies that have large welfare
implications, and more importantly, the welfare changes differ
drastically between non-college and college households. An impor-
10
tant feature that we have left out of the analysis is the potential
impact of such policies on educational decisions. It would be rea-
sonable to expect that generous UBI would lower the incentives
to attend college. Daruich and Fernandez (2022) precisely address
this issue and indeed find that UBI has a negative impact on college
attendance.
Next, we turn to a detailed discussion of the consequences of
reforms (both in steady state and along the transition). We first
discuss the case of financing UBI with labor income taxes, and then
we will briefly discuss the case of consumption taxes.
5. Financing UBI through labor income taxes
In this section we explore the effects of financing UBI exclu-
sively through labor income taxes. We discuss the implications of
different levels of UBI, adjusting k to balance the government bud-
get. In other words, we shift the labor income tax schedule while
keeping the degree of tax progressivity constant. We start with
the steady state results as shown in Table 8. The level of UBI is
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Table 7
Data vs Model: Distribution of taxes and transfers by pre-tax income percentile.

Bottom% quintile Top%

1 ½1; 5 ½6; 10 Q1 Q2 Q3 Q4 Q5 ½91; 95 ½96; 99 ½99; 100
Employment rate
Data 5.58 3.20 20.95 36.34 78.43 90.75 95.25 96.40 93.41 94.46 95.93
Model 3.24 3.93 19.11 30.41 74.25 89.60 98.84 99.97 85.98 89.96 100.00
Share of taxes paid
Data 0.00 0.03 0.29 1.51 5.98 10.94 20.50 61.07 13.86 21.46 9.67
Model 0.09 0.63 0.38 2.82 6.21 11.90 21.52 57.55 12.05 17.16 8.42
Share of taxes net of transfers
Data 0.03 0.63 0.58 1.67 4.13 10.31 21.21 66.00 15.04 23.32 10.48
Model 0.49 1.36 0.37 1.28 5.36 12.15 22.83 60.94 12.99 20.27 10.00
Share of EITC transfers
Data 0.61 14.11 17.39 61.10 29.31 7.53 1.37 0.69 0.17 0.00 0.00
Model 0.52 13.68 16.45 60.08 28.78 8.79 1.75 0.60 0.18 0.05 0.00
Share of UI transfers
Data 5.13 20.61 18.43 46.90 21.20 17.47 9.45 3.97 0.00 0.00 0.00
Model 6.12 22.73 18.27 45.77 20.21 18.33 9.33 5.36 0.01 0.00 0.00
Share of other welfare transfers
Data 10.65 21.05 17.13 65.66 18.91 8.92 5.87 0.64 0.01 0.00 0.00
Model 9.20 22.66 15.82 68.66 18.24 7.43 4.26 1.41 0.07 0.00 0.00

This table compares the distribution of the employment rate, share of taxes paid (gross and net of transfers), share of EITC transfers, share of UI transfers, and the share of
other welfare transfers by income percentile in the model with those in the data.

Fig. 8. Welfare gain with different levels of UBI and financing schemes, in %. This figure summarizes the steady state welfare results of the different UBI reforms, as a function
of the level of generosity of UBI. We use various combinations of capital income tax, labor income tax and proportional consumption tax. The welfare gains are in
consumption equivalent units relative to the benchmark.

11
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Table 8
Steady state results adjusting labor income taxes.

Benchmark 0 1 2 4 6 8  10
UBI $0 $2,240 $4,480 $8,960 $13,440 $17,920 $22,400
k 0.92 0.96 0.92 0.88 0.79 0.69 0.56 0.32
r, in % 8.01 7.98 8.26 8.57 9.23 10.10 11.32 13.69
Y 2.81 2.85 2.80 2.74 2.62 2.47 2.26 1.82
K 4.63 4.71 4.56 4.41 4.09 3.72 3.24 2.37
K NC 4.09 4.09 3.94 3.77 3.43 3.06 2.52 1.60
KC 5.91 6.14 6.01 5.88 5.62 5.27 4.92 4.17
Hum 5.25 5.30 5.28 5.25 5.18 5.09 4.93 4.56
HumNC 4.60 4.65 4.63 4.60 4.54 4.45 4.26 3.88
HumC 6.75 6.80 6.78 6.76 6.68 6.60 6.50 6.13
Empl rate,% 77.56 78.78 78.40 77.73 75.86 73.46 69.94 57.97
Empl rateNC 74.17 76.05 75.47 74.62 72.67 70.11 66.26 53.49
Empl rateC 85.47 85.35 85.23 84.97 83.29 81.28 78.53 68.42
Hours 0.33 0.34 0.33 0.33 0.32 0.30 0.28 0.22
HoursNC 0.35 0.36 0.35 0.35 0.33 0.32 0.29 0.22
HoursC 0.30 0.30 0.29 0.29 0.28 0.27 0.26 0.22
C1 0.54 0.54 0.54 0.53 0.51 0.49 0.46 0.40
C 1;NC 0.51 0.51 0.51 0.50 0.48 0.46 0.44 0.38
C 1;C 0.61 0.62 0.61 0.60 0.58 0.56 0.52 0.45
C2 1.07 1.10 1.07 1.05 0.99 0.92 0.81 0.59
C 2;NC 0.97 0.99 0.97 0.94 0.89 0.82 0.72 0.51
C 2;C 1.32 1.36 1.33 1.30 1.23 1.14 1.03 0.78
D -1.28 -1.35 -1.53 -2.36 -4.74 -7.98 -24.44
DNC -2.07 -1.90 -1.82 -2.03 -3.85 -5.54 -20.22
DC 1.37 0.49 -0.56 -3.41 -7.51 -15.05 -35.50
Dagg 0.13 -0.82 -1.61 -3.92 -7.45 -14.23 -34.01
Ddist -1.41 -0.53 0.08 1.62 2.93 7.30 14.49

This table reports the steady state aggregates and welfare implications of the UBI reforms in which the labor income tax is adjusted to balance the government budget, while
keeping other taxes unchanged. A lower k indicates a higher marginal tax rate. We use notation 0 to denote the case of no UBI; 1 to indicate a UBI that is equivalent to the
average transfer in the benchmark economy ($2,240) and so on. Notation Hum is human capital stock. D; DNC ; DC ; Dagg , and Ddist refer to the average welfare gain, the welfare
gains for non-college newborns, the welfare gains for college ones, the aggregate component of welfare gains, and the redistributive component of welfare gains.

expressed in multiples of the average targeted transfers in the

benchmark. Then we evaluate welfare along the transitional
dynamics. We close this section by discussing the role of endoge-
nous human capital and the presence of a consumption floor in
preferences.

5.1. Steady state analysis

5.1.1. A reform without UBI

The 0 UBI case is simply a reform that removes targeted trans-
fers. With other taxes unchanged, the marginal tax rate on labor
income is reduced, as implied by a higher k of 0.96. The lower mar-
ginal tax rate stimulates employment and hours worked. More-
over, capital accumulation also increases and aggregate output
increases by 1.4 percent.
The output increases but the total welfare decreases by 1.28%
due to the lack of redistribution. Removing targeted transfers
results in non-college newborns experiencing a welfare loss equiv-
alent to 2.1 percent of consumption, whereas college newborns see Fig. 9. Transfer as a function of income, in $. This figure shows how a revenue-
neutral UBI (1 UBI) differs from the distribution of targeted transfers. The x-axis is
their welfare increase by 1.4 percent. This experiment suggests
the income level as a percentage of average income. The blue line shows the dollar
that targeted transfers are a very valuable policy from the perspec- amount of the transfer received as a function of income. The red line is the revenue-
tive of non-college newborns. neutral UBI. (For interpretation of the references to colour in this figure legend, the
reader is referred to the web version of this article.)

5.1.2. A revenue-neutral UBI reform

A natural experiment is to compare the benchmark with a
world where UBI is the same as the current average targeted wel-
fare transfer. That means that every working-age household will be
receiving UBI equal to the average transfer in the benchmark econ-
omy ($2,240). This policy would be revenue neutral, except for
whatever general equilibrium effects might be present. It is the
policy experiment in the forth column of Table 8, labelled as 1.
In this case, we find that k as well as the interest rate r and wage
rate w experience only minor changes. Therefore, this is a reason-
able comparison between UBI and targeted transfer, without the
interference from tax changes and general equilibrium effects.
Fig. 9 shows how a revenue-neutral UBI implies a large negative
redistribution of income. As expected, the targeted transfers are
highly concentrated at the bottom end of the income distribution.
When a household’s income is below one-fourth of the average,
their welfare transfer in the benchmark economy vastly exceeds
the amount of 1 UBI. As calculated from Table 7, households at
the bottom 10% of the income distribution receive 41.1% of the

12
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

total targeted transfers, that is $9,180 per year, whereas a revenue
neutral UBI only provides $2,240 per year. As such, a revenue-
neutral UBI represents a large redistribution away from the poor.
One element that is always present in the debate of UBI propos-
als is its potential impact on the extensive margin of labor supply.
Due to the negative redistribution of resources as compared to the
benchmark economy, employment of non-college households
increase while it decreases a little for college households. It is
the non-college, younger and low productivity households that
see a drop in transfers, and thus they are the ones who increase
labor supply, as shown in Fig. 10. In contrast, college households
slightly decrease their employment rate due to the income effect
of UBI.
As shown in Table 8, the higher labor supply and lower con-
sumption result in a welfare loss of 1.9% for non-college newborns.
In contrast, 1 UBI generates a welfare gain of 0.5% for college
newborns. The average welfare gain is 1.4%, driven by both a neg-
ative aggregate component of 0.8% and a negative redistribution
component of 0.5%.
Summing up, a revenue-neutral UBI reform constitutes a redis-
tribution away from those most in need. As a consequence, it leads
to an increase in employment of the poorest non-college house-
holds in response to the negative income effect of the reform,
and a welfare loss for non-college newborns and a slight welfare
gain for college newborns.
5.1.3. Providing UBI equivalent to the consumption floor
The consumption floor provides a notion of the minimum
resources needed for survival. As such, it seems like a reasonable
experiment to establish is a UBI that covers those basic consump-
tion needs. In this experiment we consider a UBI roughly equal to
the consumption floor, i.e. four times the average targeted transfer
(4 UBI), or $8,960 per household. Incidentally, this magnitude is
similar to the highest level of targeted transfers reported in
Fig. 9. In that sense this reform can also be interpreted as making
universal the highest level of transfers, eliminating the distortions
introduced by the means-tested nature of transfers.
With such a policy the marginal tax rate on labor income must
increase (lower k, 0.79). This discourages labor supply, and
employment rates and hours worked drop for both college and
non-college households. This suggests that the elimination of the
distortions introduced by the means-tested nature of targeted
transfers does not play a big role on aggregate labor supply. At least
at the aggregate level the income effect of universal transfers dom-
inates and labor supply falls. Moreover, capital also drops and out-
put experiences a drop of 7 percent.

Fig. 10. Employment rate of the non-college group. Benchmark vs 1 UBI with labor tax (fixing other taxes). This figure shows the employment of the non-college group.
Three sub-figures compare the employment rates between benchmark (blue) and reform (red) by age, human capital, and labor shock. (For interpretation of the references to
colour in this figure legend, the reader is referred to the web version of this article.)

Fig. 11. Percentage change in employment rate, in %. This figure shows the change in employment relative to the benchmark for different levels of UBI financed with labor
income taxes. Different colors represent different age groups.

13
J.C. Conesa, B. Li and Q. Li
The lower panel of Table 8 reports the welfare consequences.
Both college and non-college newborns experience welfare losses,
and the reason is that the aggregate losses outweigh the distribu-
tional gains of UBI.
5.1.4. The impact of more generous UBI
Fig. 11 shows that as UBI increases further the negative impact
on labor supply is increasingly larger. Moreover, the fall in employ-
ment affects substantially more the younger non-college
households.
Fig. 12. Transition path. This figure shows the evolution of selected aggregate variables along the transition path following the introduction of a UBI of $8,960, financed with
labor income taxes.
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Journal of Public Economics 223 (2023) 104881
With more generous UBI output drops exponentially, account-
ing for the large and generalized welfare losses, at the same time
that it imposes a bound on the sustainability of UBI in equilibrium.
5.2. The transition dynamics
In this section we discuss the implications of the transitional
dynamics of a UBI reform that provides $8,960 per household. This
reform provides four times the average means-tested transfers,
which is roughly the same amount as the consumption floor and
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

the magnitude of the largest targeted transfers provided in the
benchmark economy.
Fig. 12 plots the transition path of selected aggregate variables.
The evolution of k implies a substantial increase in labor income
taxes on impact of the reform. The interest rate goes down for a
short period and then climbs up to a level higher than the bench-
mark. Output and capital go down, as well as basic and non-basic
consumption. The sudden switch to the UBI system discourages
labor market activity: both employment and hours worked fall
on impact by 5.5% and 10% and then gradually rise to a level still
lower than the benchmark. The change in labor supply is because
when the reform starts, the generous UBI discourages labor supply
due to its income effect for low skilled households. Furthermore, a
higher income tax is required to finance UBI, which further dis-
courages the labor supply.
With the reform most of the households experience welfare
losses, and those losses are decreasing in wealth. Overall only
23.6 percent of the population experience welfare gains from such
a reform (26.4 percent for non-college households, and 16.9 per-
cent for college ones). The individuals that benefit the most are
the very wealthy middle-age individuals who were already not
working in the benchmark. These individuals collect a UBI transfer,
and receive a higher return on their wealth (except for the initial
periods of the reform). Moreover, since they do not work the fall
in wages and the increase in labor income taxes does not affect
them. This explains why the reform benefits more the non-
college, since they are less likely to work for a given level of wealth.
We have also experimented with more generous UBI reforms.
Recall that from Table 8 that the magnitude of UBI that is sustain-
able is limited. A transition introducing a UBI of $22,400 (10x UBI)
implies even more generalized (and larger) welfare losses. Only
16.5 percent of non-college households and 12.3 of college house-
holds benefit from the reform.
5.3. The role of endogenous human capital
UBI affects employment decisions and hence human capital,
which has a non-trivial impact on life-cycle earnings and resulting
welfare. In order to quantify the impact of endogenous human cap-
ital, in this section we compare our results to the outcome of the
same policy experiments using a version of the model with human
capital fixed exogenously. Specifically, we fix human capital at the
same levels as those in the benchmark economy with endogenous
human capital, given education and age. This means that human
capital is deterministic and only differs along the age and educa-
tion dimensions. We recalibrate the initial economy with means-

Fig. 13. Welfare comparison between endogenous and exogenous human capital. This figure plots the welfare gains of financing UBI with labor income tax. The X-axis is the
level of UBI. Panel (a) compares the average welfare gains in different UBI reforms between endogenous and exogenous human capital. Panel (b) and Panel (c) plot the
equivalent welfare gains of non-college and college newborns, respectively.

15
J.C. Conesa, B. Li and Q. Li
Fig. 14. Percentage change from the benchmark, in %. This figures compare the aggregate variables when human capital is endogenous vs exogenous. The blue lines are for
the endogenous human capital model, while the red lines are for the exogenous human capital model.
tested transfers to target data as described in Section 3. Then we
perform the same policy experiments on the benchmark model
with exogenous human capital.
The comparison of the welfare results in the corresponding
experiments is reported in Fig. 13. We find that endogenous
human capital decreases the welfare gains (increases the welfare
losses) from the reforms with fixed human capital. The reason lies
on the additional negative impact of non-employment on future
labor productivity. Moreover, the difference in welfare is much lar-
ger for non-college households, because they are more likely to
lower labor supply with generous UBI.
Fig. 14 plots the percentage changes in aggregate variables rel-
ative to the benchmark in both environments. The model with
endogenous human capital generates a smaller drop in employ-
ment and hours worked in response to the generosity of UBI. How-
ever, because human capital still falls, earnings fall more in a
model with endogenous human capital. As a result, both capital
accumulation and consumption fall more with generous UBI.
While it is true that endogeneizing human capital increases the
welfare losses of the reforms, casting a less favorable picture of UBI
desirability, it is fair to say that the main qualitative conclusions
regarding the size of UBI and its financing are unchanged.
5.4. The role of the minimum consumption of basic goods
In this section we evaluate the impact of the existence of a min-
imum consumption of basic goods. In order to do so, we perform
the same experiments as above in a model without the minimum
consumption. Fig. 15 presents the welfare gain on average, for non-
college and college newborns, and the aggregate and redistribution
components of welfare gains.
16
Journal of Public Economics 223 (2023) 104881
The comparison suggests that having a minimum consumption
pushes the results in a more favorable view of UBI. As expected,
this effect is particularly important for non-college households.
Still, the basic conclusion about the non-desirability of UBI is unaf-
fected. The presence of the consumption floor diminishes the wel-
fare losses of UBI, but it does not change its sign.
We compare the impact of the reforms on aggregate variables in
Fig. 16. The existence of a consumption floor decreases the nega-
tive impact of generous UBI on all aggregate variables. That is the
reason why even the range of UBI that can be sustained in equilib-
rium is larger in the model with a consumption floor.
6. Financing UBI with consumption taxes
6.1. Steady state analysis
In the previous section we saw that even though generous UBI
is highly redistributive, it still results in welfare losses. The distor-
tions associated with the magnitude of UBI and its financing result
in lower output. Moreover, the magnitude of UBI that can be sus-
tained in equilibrium is imited.
In this subsection we explore the implications of reforms that
finance UBI with consumption taxes instead.4 In order to isolate
the impact of UBI and its financing we leave all income taxes
unchanged in our experiment.
4
There is a long standing tradition of computing the welfare implications of
switching to consumption taxation. Anagnostopoulos and Li (2013) and Conesa et al.
(2020) do exactly that and discuss that literature.
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Fig. 15. Welfare comparison with and without consumption floor. This figure presents the welfare result of financing UBI with labor income tax, with and without
consumption floor. Panel (a) compares the welfare gains in different UBI reforms. Panels (b) and (c) plots welfare non-college and college newborns, respectively. Panel (d)
and Panel (e) present the aggregate and redistributive components of welfare gains.

Our results suggest that financing UBI with consumption taxes
is less distortionary. We see in Fig. 17 that the wage rate is in fact
slightly increasing with UBI generosity when financed with con-
sumption taxes, as opposed to decreasing when using income
taxes. When UBI is slightly above $15,000, wages even increase rel-
ative to the benchmark. The fact that consumption taxes are less
distortionary implies that the range of UBI that is sustainable is
much larger. (see Fig. 18).
Table 9 reports the steady state aggregate and welfare implica-
tions of UBI reforms financed with proportional consumption
taxes. Using differential taxation across the two consumption
goods results in very similar outcomes. As before, we report the
results for different multiples of the magnitude of targeted trans-
fers in the benchmark economy.
We specifically discuss the results of a revenue-neutral UBI
reform, a UBI that covers the consumption floor, as well as more
generous UBI levels.
When using a proportional consumption tax to finance a
revenue-neutral UBI, namely 1 UBI, the resulting tax rate is
5%, interest rate increases and the wage drops. The magnitude
of the changes in prices in this case is very similar to the
revenue-neutral UBI reform financed with labor income taxes.
Therefore, the changes in aggregates as well as welfare are also
similar. Because a revenue-neutral UBI redistributes transfers
from low skilled to high skilled households without much change
in aggregates, non-college newborns experience a welfare loss of
2 percent, whereas college newborns experience a gain of 0.6
percent.

17
J.C. Conesa, B. Li and Q. Li
Fig. 16. Percentage change from the benchmark, in %. This figure plots the percentage change in the aggregate variables in the model with (blue) and without (red)
consumption floor. The magnitude of UBI is in the X-axis.
As UBI gradually increases, the consumption tax must increase.
In order to finance a UBI that covers the minimum consumption
(4), the consumption tax is 17 percent. In that case output falls
by 3 percent, compared to 7 percent when UBI is financed with
labor income taxes. Non-college newborns experience a 0.2 per-
centage gain in welfare and college ones see a 0.3 percent loss.
Fig. 17. Wage rate, percentage of benchmark, in %. This figure shows wages as a
function of UBI generosity, when UBI is financed with labor income taxes (blue) and
with consumption taxes (red). (For interpretation of the references to colour in this
figure legend, the reader is referred to the web version of this article.)
18
Journal of Public Economics 223 (2023) 104881
As shown in Table 9, more generous UBI can be sustained when
financed with consumption taxes. At 20 UBI (close to $45,000 per
household), the average welfare gain is 3 percent, with an aggre-
gate component of 16 percent and a redistributive component
as large as 23 percent. The non-college newborns experience a wel-
fare gain of 11 percent, while the welfare of college ones declines
by 17 percent.
Notice, though, that the comparison of the magnitude of UBI
between the different financing schemes can be somewhat mis-
leading. Take the case of 20 UBI as an example, in which house-
holds receive close to $45,000. However, the monetary quantity of
this transfer translates into half of it in consumption terms, since
the consumption tax is around 100 percent. Therefore, measured
in effective purchasing power 20 UBI financed with consumption
taxes is comparable to 10 UBI with labor income taxes. Even if we
do that comparison the fall in output is much smaller with con-
sumption taxes.
The steady state results suggest that financing UBI with con-
sumption taxes would result in better outcomes both in terms of
aggregates and welfare. In the next section we show that this
insight does not necessarily translate to the analysis of welfare
along the transitional dynamics.
6.2. The transitional dynamics
In this section we discuss the transitional dynamics of a UBI
reform that provides $8,960 per household financed with con-
sumption taxes. Compared with the transition of the UBI reform
financed with labor income taxes, all the aggregates exhibit a sim-
ilar pattern, except that the magnitude of the drop is smaller. This
J.C. Conesa, B. Li and Q. Li
Fig. 18. Transition path of UBI reform providing $8,960, financed with consumption taxes. This figure shows the evolution of selected aggregate variables along the transition
path.
result is in line with our analysis of the steady state, and confirms
that consumption taxes create less distortions than income taxes.
Such a reform only benefits 16.3 percent of the households
(21.3 percent of non-college households and 4.7 percent of college
ones). Recall that this reform is better from the perspective of new-
borns in the long run than a reform financed with labor income
taxes, because the fall in output is smaller. However, even more
people experience welfare losses with this reform. Only a handful
of young and wealth-poor households benefit from the reform.
Those are households that see their transfers increase and can
afford to work less.
19
Journal of Public Economics 223 (2023) 104881
Moreover, in contrast to the reform financed with labor income
taxes, in this case the welfare losses are increasing in wealth. The
reason is that wealthy households benefit relatively less from the
higher transfer and suffer more from the increased consumption
tax.
When we experiment with a more generous UBI of $22,400 (x10
UBI, as we did for the case of labor income taxes), we find that the
welfare losses are larger and even less households benefit from the
reform. Only 13.5 percent of non-college households benefit, and
all college households loose from the reform.
J.C. Conesa, B. Li and Q. Li Journal of Public Economics 223 (2023) 104881

Table 9
Steady state results of adjusting consumption tax.

Benchmark 0 1 2 4 8  12  16  20
UBI 0 $2,240 $4,480 $8,960 $17,920 $26,880 $35,840 $44,800
sc1 ¼ sc2 0.00 0.01 0.05 0.09 0.17 0.35 0.56 0.79 1.03
r, in % 8.01 8.30 8.27 8.24 8.17 8.00 7.90 7.88 7.77
Y 2.81 2.84 2.81 2.77 2.72 2.61 2.49 2.38 2.30
K 4.63 4.62 4.57 4.53 4.45 4.31 4.12 3.94 3.84
Hum 5.25 5.30 5.28 5.26 5.22 5.15 5.02 4.90 4.83
HumNC 4.60 4.66 4.64 4.61 4.56 4.47 4.30 4.15 4.07
HumC 6.75 6.79 6.78 6.77 6.77 6.72 6.70 6.65 6.61
Empl rate,% 77.56 79.08 78.49 78.00 77.06 75.13 73.45 71.28 69.18
Empl rateNC 74.17 76.32 75.59 74.98 73.81 71.42 69.31 66.50 63.76
Empl rateC 85.47 85.50 85.27 85.05 84.66 83.77 83.10 82.41 81.83
Hours 0.33 0.34 0.33 0.33 0.32 0.31 0.29 0.27 0.26
HoursNC 0.35 0.36 0.35 0.35 0.34 0.32 0.30 0.28 0.26
HoursC 0.30 0.30 0.29 0.29 0.29 0.28 0.27 0.26 0.26
C1 0.54 0.53 0.52 0.52 0.51 0.49 0.47 0.45 0.44
C 1;NC 0.51 0.50 0.49 0.49 0.48 0.46 0.44 0.43 0.41
C 1;C 0.61 0.59 0.59 0.58 0.57 0.55 0.53 0.51 0.49
C2 1.07 1.11 1.10 1.08 1.04 0.97 0.90 0.83 0.78
C 2;NC 0.97 1.00 0.99 0.97 0.93 0.87 0.80 0.74 0.69
C 2;C 1.32 1.37 1.35 1.33 1.29 1.20 1.13 1.05 0.99
D -2.26 -1.44 -0.90 0.02 1.04 1.99 2.73 3.22
DNC -3.23 -2.06 -1.22 0.12 2.72 5.46 8.35 11.40
DC 0.99 0.64 0.16 -0.31 -4.06 -7.82 -12.05 -16.59
Dagg -0.56 -0.64 -1.07 -2.06 -4.43 -8.03 -12.38 -16.16
Ddist -1.71 -0.80 0.17 2.12 5.72 10.90 17.24 23.13

This table shows the impact of UBI reforms financed with consumption taxes. Each column represent a different level of UBI generosity, expressed as a multiple of average
targeted transfers in the benchmark.

To summarize, financing UBI with consumption taxes is less
distortionary and makes more generous UBI possible. But that does
not mean that more people would benefit from such a reform. The
increase in taxes necessary to pay for UBI generates welfare losses
for a large majority of households, and only a few young house-
holds with low wealth benefit.
tial concern is that in frictional labor markets UBI would change
the incentives to search for and retain jobs. All of those aspects
might contribute to a more favourable evaluation of UBI
desirability.
Data availability

Data will be made available on request.

7. Summary and conclusions
Our results suggest that UBI reforms result in large welfare
losses for a vast majority of households. Moreover, the losses are
increasing in UBI generosity. We also find that there are significant
differences in the implications of UBI depending on how it is
financed. When UBI is financed with labor income taxes the mag-
nitude that is sustainable is limited, and the reforms mostly benefit
non-college households with enough wealth to afford not working.
In contrast, when UBI is financed with consumption taxes more
generous UBI is sustainable, and the reforms mostly benefit young
non-college households with low levels of wealth. However, the
fraction that benefit from reforms is smaller when financing UBI
with consumption taxes.
Regarding the debate of UBI as an alternative to means-tested
transfers, there is always a trade-off between the positive effect
of eliminating the distortions on labor supply at the bottom of
the income distribution and the negative impact on employment
and hours through the income effect of a generous universal trans-
fer and the distortions necessary to finance it. Our quantitative
results suggest that the second effect dominates, generous UBI
results in much lower employment and hours especially for the
young non-college population, even if the distortions of means-
tested transfers are eliminated.
In our analysis, we have abstracted from a wide range of issues
that are also part of the debate. We abstract from the discussion
regarding new technologies and their impact on employment
opportunities for the less skilled. Also, we do not include in the
analysis the administrative costs of existing welfare programs
and the potential savings of UBI along this margin. Another poten-
Declaration of Competing Interest
The authors declare that they have no known competing finan-
cial interests or personal relationships that could have appeared
to influence the work reported in this paper.
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