Maximilian Sommer, A Feasible Basic Income Scheme for Germany

Maximilian Sommer, A Feasible Basic Income Scheme for Germany: Effects on labour supply, poverty, and income inequality, Springer, 2016, 978 3 319 24062 6, hbk, xxi + 198 pp, £90

The first thing to say about this book is that the title does not describe what the book is about. The book is about a Negative Income Tax, and not a Basic or Citizen’s Income. A Basic Income is an unconditional, nonwithdrawable income paid to each individual. A Negative Income Tax employs the tax system to add to an individual’s earnings if those earnings fall below a given threshold. It is certainly true that ‘from an economic point of view’ (p. 54) – that is, from the point of view of some forms of economic theory – Negative Income Tax and Basic Income are the same thing: but the administration of a Negative Income Tax is very different from that of a Basic Income, and that matters.

The book sets out from such normative justifications for Citizen’s or Basic Income as Philippe Van Parijs’s ‘real freedom’, and from a recognition that means-tested benefits discincentivise employment market activity. The author then proposes a particular revenue neutral Negative Income Tax for Germany, and evaluates its cost, its effects on poverty, and its likely effects on labour supply and levels of earned income. (In order to understand the argument the reader will need to be comfortable with some fairly complex economic theory and some equally complex mathematics). Readers will need to take particular note of the fact that the Negative Income Tax scheme that Sommers proposes would only apply to families containing at least one employable individual (p. 83), and that this constitutes an additional difference from Basic Income, which by definition would be received by every legal resident. The one part of the proposed scheme that is a Basic Income is an annual payment for each child. Unfortunately, Sommers also proposes a child element attached to the Negative Income Tax without resolving the considerable administrative difficulties that this would impose. An additional complexity relates to the retention of Germany’s joint taxation of married couples, which means that the Negative Income Tax administration would need to be household-based rather than individual-based; and another is that Sommers allows each household (not each individual) to choose whether to go for his Negative Income Tax or whether to stick with a revised social security scheme that withdraws earned income at 100%.

Sommers employs microsimulation to simulate wage rates in relation to age, education level, and a variety of other factors. He then tests the microsimulation results on today’s labour supply, and goes on to estimate labour market changes that would result from implementing the proposed Negative Income Tax. Sommers discovers a complex picture, but some significant results are obtained: the number of households undertaking zero hours of employment would fall, the total number of employment hours would rise, and the number of hours of employment undertaken by households with dependent children would fall. The method that Sommers uses could usefully be employed in other contexts, and it could usefully be extended to create a more dynamic model, which would employ changing marginal deduction rates alongside changing wage rates. As Sommers recognises, changes in the labour supply do not necessarily match changes in labour demand. A further research project might be macrosimulation to estimate the changes in labour demand that might follow from the implementation of a Negative Income Tax.

When it comes to an evaluation of whether the proposed scheme would reduce poverty, Sommers proposes a two-tier definition: ‘physical poverty’ (similar to ‘absolute poverty’) and ‘sociocultural subsistence minimum’ (similar to ‘relative poverty’ – that is, the income that a family needs to participate in society’s normal activities). He then rather loses sight of the distinction, but finds that his Negative Income Tax scheme would reduce poverty, particularly for families with larger numbers of children.

While the book does contain some discussion of the differences between a Basic Income and Negative Income Tax, the administrative simplicity of Basic Income and the administrative complexity of Negative Income Tax remain implicit rather than discussed. When Sommers gets close to discussing the administrative differences between the two, he suggests that ‘this is a question of the actual implementation of a specific scheme and exceeds the scope of this paper’ (p. 61). Is that true? The book claims to be about the feasibility of a scheme, so administrative feasibility is surely as important as any other kind of feasibility.

At the end of the book, Sommers recognises that he has shown that a particular Negative Income Tax scheme would be financially feasible, and that psychological feasibility still needed to be proved (p. 177). He has also shown that his scheme would be behaviourally feasible, because it would increase labour supply. Perhaps Sommers could now write a second volume that would add considerations of psychological and administrative feasibility to his existing work on administrative and behavioural feasibility.

The book needs an index and a bibliography, but doesn’t have either; and it contains far too many proofreading errors. This is a pity, because this is an important book. One might wish that a genuine Basic Income had been tested: but the thorough testing of a Negative Income Tax that the book does contain offers many useful lessons to those of us who research the feasibility of Citizen’s Income schemes – and in particular the lesson that it is important to evaluate as rigorously as possible the likely labour supply effects of proposed schemes.

The book says that it is interdisciplinary and it is. Sommers has shown himself to be both competent and interesting in relation to both political economy and economics, and he often mixes the disciplines to creative effect. It would be a pleasure to see him employ his considerable philosophical, economic, and mathematical skills on the evaluation of a genuine Basic Income.