Shall a Means-Tested Basic Income Substitute Traditional Welfare?

Abstract

For the first time in modern history Spain adopted in 2020 a means-tested basic income. Using Saez and Stantcheva (2016) approach to social welfare, we test whether this policy is optimal within the well-documented event of gradual replacement of unskilled workers by machines. This policy is compared to traditional welfare, represented by an optimal Earned Income Tax Credit (EITC). We find that for a liberal social planner, who includes consumption and leisure in individual's utility, a means-tested basic income dominates traditional welfare. For a conservative social planner, who evaluates social welfare by looking only at individual's utility from consumption, traditional welfare dominates a means-tested basic income. However, if we allow for dynamic effects which account for the effects of the EITC on labor supply, traditional welfare dominates the means-tested basic income for both types of social planner. A remarkable result is that for both types of social planner government's role for redistribution substantially rises as machines replace workers.