Cash Transfers – A debate of conditionality

Cash Transfers refers to a form of redistribution of wealth in form of direct cash grants by government to section of people it identifies as eligible for social security programs, instead of indirect programmes. They have become increasingly popular over the past decade in developing countries, who have started to realize the benefits seems to outweigh the risks they anticipated.

There were a number of myths prevailing around the risks of cash transfer to the poor and underprivileged. A common misconception is that handing money to poor households will lead to increased consumption of alcohol and cigarettes, cause dependency, lead to price inflation in the economy due to more money in the hand of the public. Research by UNICEF across African nations of Ethiopia, Ghana, Kenya, Lesotho, etc. has proven otherwise. There was no evidence of an increase in expenditure on alcohol or tobacco; there was a positive effect on the local economy due to increased consumption, and an increase in productive agricultural activities across six countries. While it is generally accepted that market forces would be the most appropriate means to reduce poverty, it does need a push from time to time, in form of direct government intervention like these.
However, the real crux of the debate lies in the nature of cash transfers. The opinion is split between whether cash should be given unconditionally to a particular set of identified households, or there be some conditions and actions necessary to be performed by the households before any transfer. Proponents of direct transfer argue that it is morally difficult to justify denying households assistance if they miss certain conditions, and result in exclusion errors. Proponents of conditional transfer suggest that these conditions lead to investment and spending on human capital factors – such as education, healthcare, etc. that has better long-term benefits.
Developing nations too, seems to follow different policy prescription. One of the biggest star of conditional cash transfer has been Bolsa Familia conditional cash transfer scheme of Brazil. It translated to a monthly stipend of 32 reais per school-attending child, who also had to have regular medical check-ups, to all families whose household income were below 140 reais per month. This programme saw a fall in extreme poverty from 8.8% in 2002 to 3.6% by 2012, at a 0.5% of GDP cost to the nation annually.
On the other hand, India launched Direct Benefits Transfer in 2012, which focused on substituting, and at some places complementing, existing food, fuel, & scholarship benefits. The government has since saved nearly $7 billions annually in form of leakages and corruption. Despite these, the program has been criticized for its implementation without existing infrastructure of financial inclusion and reliable cash disbursement in remote areas.
Economists suggest a combined approach is the way to go ahead. It is critical to identify the reasons of failure in education and healthcare, and tailor direct transfers with conditions specific to demographics features of the nation. As for results, only cross-country, time series experimentations will shed some light.

Abhaas Mohan

Is Lisbon the new Amsterdam?

What do cities such as Venice, Rome, Barcelona and Amsterdam have in common besides remarkable landmarks and rich history? Protests. More specifically, protests about the number of tourists pouring in these cities at an increasing rate. Venice’s situation with mass tourism has gotten so bad that the city might end up in the “world heritage sites in danger” list by UNESCO. Amsterdam, in 2016, was visited by 17 million people in a city with 850.000 people living in it. The local council has decided to raise taxes on several different types of accommodation for tourists. It plans to introduce a fixed amount, per night, up until 10 euros adding to the already fixed 5% tax on the cost of accommodation. The goal, according to Udo Kock, is to reduce tourists with a lower purchasing power and diminish stag weekends.

Tourism brings significant economic benefits with the creation of jobs in the sector and others related (Retail for instance) which will increase demand for goods and services in other sectors creating even more jobs thus having the famous “multiplier effect”. Furthermore, it will increase corporate revenues and household income which can be taxed. The money received from these taxes can be used to renew historical sites or invest in ads in order to promote even more tourism, thus, restarting the cycle. Despite all the benefits, it also has its downsides. Some social issues arise, for instance, large crowds and long queues on transports or restaurants. As the number of visitors increases, so does the costs of cities with policing and cleaning services for instance. Moreover, rent prices can become unaffordable for the locals which might drive them out of the city center to the periphery.

This last argument of rise in rent prices was a hot topic during the last council elections in Portugal. Tourism in Lisbon and Oporto was discussed on several debates among the candidates. Portugal has been breaking records, every year, in terms of visitors in the country. Low fare airlines and cheaper lodging options (such as Airbnb) have been “promoting” more and more travelling and the trend is to rise in the upcoming years.

Nowadays, Lisbon has a council tax of 1 euro per night (per person) up until 7 days which compared to other major european cities is somewhat low. Given the astonishing growth of Lisbon in terms of tourists, is the fate of Lisbon the same as Amsterdam’s? What can possibly be done to prevent the negative impact of tourism and ease some feelings of the locals and, at the same time, not kill the sector which has a great impact in the portuguese economy?

A regressive tax on the quality of the accommodation might be one possible solution. This would reduce the number of lower purchasing power tourists and increase “high end tourism”. This could increase revenues from spending and, the same time, decrease some crowds and long queues.

Moreover, “harsher” regulation on suppliers of short-term housing by reducing the length of stay.

 

Miguel Alves Castro

 

Supporting low-income migrant workers to buy homes in China

Recently,there are about 282 million rural migrant workers in China, which is one third of labor force in China. In this post, migrant workers refer to workers who have rural household registration. (In China, there are two kinds of household registration, urban household registration and rural household registration) Migrant workers make a significant contribution to Economic development in China. However, a lot of migrant workers cannot enjoy the same public service as urban household registration holders. When it comes to education, housing and social medical care, there is a difference. Since they do not have a home in the city, their children and other family members stay in their hometown and are away from migrant workers. It’s essential for public policy makers to publish more helpful policies to help low-income migrants to purchase an affordable home in urban areas.

In recent years, China has encouraged white collar workers to buy houses due to house supply surplus; however, the demand is limited. In fact, rich people usually have more than one real estate property, not only for private use but for investment as well. This phenomenon has caused ghost town appear in several parts in China. Thus, as Rosealea Yao, a China investment analyst for research firm Gavekal Dragonomics said, we cannot ignore the demand from low end since there is no demand at the higher end. The importance of keeping the construction volume is obvious because one third of GDP growth comes from real estate and construction, according to Rosealea Yao.

The problem existing in real estate purchasing in China is that rich people buy several houses and make the price go up while low income people cannot even afford to buy one house for basic living. To solve this issue, the government has carried out policy such as interest-rate cuts and the removal of purchase restrictions. However, this does not help a lot to low income migrant workers; most encouraged buyers were white collars. In February 2016, the government cut minimum payments down to 20% for first homes and reduced transaction taxes as well.

To conclude, it is necessary to balance the real estate supply and demand in a healthy way. Otherwise, the supply surplus may influence the price of houses and decrease in construction. A good method is to encourage low income migrant workers who have a large demand to buy homes in cities and avoid rich people to buy too many real estate properties for investment. To achieve this, having a higher property tax for second house, which is carried out by the government, is helpful. In addition, helping low income migrant workers to have better access to mortgage loan as well as controlling the price as an affordable one should also be taken into consideration more.”>282 million rural migrant workers in China, which is one third of labor force in China. In this post, migrant workers refer to workers who have rural household registration. (In China, there are two kinds of household registration, urban household registration and rural household registration) Migrant workers make a significant contribution to Economic development in China. However, a lot of migrant workers cannot enjoy the same public service as urban household registration holders. When it comes to education, housing and social medical care, there is a difference. Since they do not have a home in the city, their children and other family members stay in their hometown and are away from migrant workers. It’s essential for public policy makers to publish more helpful policies to help low-income migrants to purchase an affordable home in urban areas.

—By Qianyu He

Can taxation change tobacco consumption?

Taxation is by definition a mean by government finance its expenditure by imposing charges on citizens or corporate entities. But taxation is also a tool used by the government to redistribute in order to leverage the society welfare, this could be achieved by investing in the public sector, like education and healthcare, or as a way to lead citizens to change their behaviour, for example by the taxes that Portuguese government implemented on sugar drinks, tobacco or alcohol beverages.

Therefore, when comes to taxes, remains the question: who puts up with the burden of the taxes? Consequently, it comes the concept of tax incidence. To a better understanding of this issue, let’s take as example the Portuguese taxation over tobacco. Tobacco is one of the main cause of chronic diseases, what makes it costly for citizens’ heath and also for the public healthcare sector. In order to discourage the consumption, similarly to what has been implemented in other European countries, cigarettes are charged by two elements: an excise tax and an ad valorem (VAT) tax.

For the government budget of 2017 (OE 2017), in regard to the previous year, the excise tax charged increased to 3% and the VAT to 16% for cigarettes. To face this taxation, entities increased the prices of each pocket of cigarettes by around 0,10€, this situation creates a shift to the consumers that end up supporting the burden of tax. However, tobacco is a bit controversial product since it cannot be easily classified as an elastic product demand, this means that there are low substitutes, additionally to the fact that is an addictive product, it is difficult to consumers just simply drop it. Consequently, the distortion usually caused by changes in consumed quantities would have little effect in this case in comparison with other products, like sugar drinks. This effect is commonly known in economics as deadweight loss, which describes the phenomenon of loss in efficiency, this means that the government did not reach the expected revenue, since as the price of the products increase due to taxation, the price sensitive consumers would look for less expensive substitutes, creating by this way the change in quantities bought by consumers.

A study driven by WHO, “Taxation and the Economics of Tobacco Control” states that tobacco taxation has been preventing non-smokers to star smoking and lead current smokers to try to give up. After taxation, tobacco consumption seems to have decreased around 5% in Portugal. However, the government revenues are still below from what is needed to cover the expenditures on diseases related with this product. But it can be asked: The decreased demand was only due to taxation? The answer is not clear, as it can rely on several factors, for example some people might have given up because they get ill or due to the law enforcement about rules of smoking in public spaces.

Raquel Teixeira

Pay me what you owe me: Europe taxing the digital economy

According to recent public debate, European governments have been missing on quite a chunk of tax revenue. Numerous firms have been getting away with paying virtually no taxes in European countries where they have billions in revenues. They took advantage of the different corporate tax rates across Europe, registering their profits in the countries with the lowest effective rates, despite operating in other countries as well.

The scandal came to the forefront in November 2014 when thousands of documents were leaked by a former employee of PwC. They exposed how over 300 firms worked closely with accounting firms and tax authorities so as to secure the legality of the scheme. Ever since, the EU has launched a number of investigations into companies’ tax dealings, targeting foremost tech giants, which featured many times throughout those documents.

Matters escalated since 2016. The European Commission accused Apple of getting illegal state aid, after a 3-year investigation into the company’s tax affairs. A deal between Apple and Ireland granted the former a tax rate of 0,005% in 2014, while the country’s usual rate of corporate tax is 12,5%. As a result, Apple was fined €13bn in back-taxes, that is, taxes that were not paid when due in past years (https://www.theguardian.com/business/2016/aug/30/apple-pay-back-taxes-eu-ruling-ireland-state-aid). A study conducted by the Centre for Economics and Business Research found that UK bookshops pay eleven times more corporate taxes than Amazon. In 2016, Amazon increased its volume of business in the UK to nearly £1.5bn, while it paid less 8.4m in corporate taxes – a flat contradiction (https://www.theguardian.com/books/2017/sep/12/amazon-pays-11-times-less-corporation-tax-than-traditional-booksellers).

The tipping point came, in my opinion, in July 2017. A French court rejected an effort by the French government to fine Google in €1.115bn in back-taxes. Paris claimed Google had its paperwork go through Ireland to disguise its revenue from France ad sales. Although the court didn’t agree, it’s a fact that Google’s effective tax rate is far from Ireland’s legal rate of 12,5%, as we can see from the following graph (https://www.bloomberg.com/view/articles/2017-07-13/france-shouldn-t-let-google-get-off-tax-free):

This slap in the face was crucial for France to realise the solution to the issue at hand: it shouldn’t focus on demanding back-taxes, but on creating new legislation on tax avoidance. Hence, the new initiative by French President Emmanuel Macron: taxing tech giants based not on profits (Europe’s current method) but on revenues generated in each country.

Tech groups shouldn’t take all the blame though. For years, governments all over Europe pushed for cuts on corporate taxes to attract US tech giants to Europe. Curiously, one EU official who is currently backing the French plan is none other than Jean-Claude Juncker, the President of the European Commission, who formerly pushed for those tax cuts while serving as Luxembourg’s prime minister. Tables do turn.

On a final note, it all comes down to whether tech giants are just maximising shareholder returns or unethically avoiding taxes. I’d bet on the latter.

 

Pedro Afonso | Masters in Economics @ Nova SBE

What the eye doesn’t see, the heart doesn’t grieve over

We are in the aftermath of the Portuguese local elections, nonetheless, our attention is already being needed for one of the major decisions at the country level: the Portuguese Government Budget (OE). Approximately one month separate us from the start of the discussion on the topic. So, in this article, I will recall one of the main debates around the first Budget of the current mandate: the shift in weight of direct taxes towards indirect taxes. The point I will be making is that 1) this change was likely perceived by citizens as a decrease in total taxes paid; 2) the substitutions of revenue from income taxes to consumption taxes decreased the overall distortion of the tax system; 3) the opinion I present in the previous point can also be corroborated by citizens feelings of fairness towards the tax they pay. Hence, this article is presented as food for thought as little (and quite ambiguous to attain) evidence exists.

On the discussion of the OE 2017, one of the main arguments by the opposition for the shift in tax nature, was that it would make the system less progressive. In other words, the government would be substituting a direct tax rate that is higher for the rich and lower for the poor, for an indirect tax that is the same for everyone and people only pay more if they consume more. In this article, we will disregard equity considerations and historical trends of economic variables, namely GDP which influences the tax burden measure (tax revenue divided by GDP), and focus on the public perception of the tax (assumed to be positively correlated with the distortionary power). This said, what happened in those years was that even though the tax revenue increased, public opinion seemed to be of approval of the lower income tax, ignoring taxation on products (indirect taxation).

In my opinion, there are two strong arguments to explain this acceptance rate. First, a lesser perception of the taxes which started to be hidden in the price of products and not well discriminated as in the difference between the gross and net salary. Important to notice that consumers’ perception of increases in price has many flaws, which reinforces why people will ignore the indirect tax. Secondly, considering people were not happy with the policies at the time, one can argue that income tax that people believed it would turn into erroneously spent government revenue was substituted by different consumption taxes pursuing objectives people could connect to, such as, tax on sugar, on cigarettes or pollution.

This shift may induce more support for government spending reducing tax aversion by citizens as defended by Listokin and Schizer, professors at Yale and Columbia Law Schools, respectively.

To conclude, the decision on taxes of the OE 2017, disregarding equity considerations seemed to be popular, what in the context of the current politics was determinant to win the confidence of the Portuguese taxpayer.

 

João Matias

Carbon Taxes: Improving or creating social issues?

One of the biggest challenges of our time is how to combat the ever-increasing threat of climate change. Policy makers around the world are dealing with the issue on a daily basis and there is always a lot of discussion around the effectiveness of the different policies. The introduction of a carbon tax, which belongs to the category of carbon pricing policies, is certainly one of the most cited ways to efficiently address CO2 emissions in a given economy. Yet, there is also increased concern about both the efficiency and equity of such a tax. The question thus remains: Can a carbon tax help solving a social issue without creating another one?

It is argued that one of the main concerns about a carbon tax is that, like other consumption taxes, it is a regressive tax and therefore affects people with low incomes more severely than people with high incomes. As a response, academics have argued that when a certain percentage of the carbon tax revenue will be spend on society’s poorest, e.g. by increasing social safety net programs, then those households would, in fact, not be worse off with such a tax. This shows that, to be able to effectively assess the impact of such a tax, one will need to carefully consider both the expenditure as well as the revenue side of the tax because only that can deliver a holistic picture.

Besides looking at these two sides of a tax, it is also important to understand the impact on different stakeholders. Research has shown that households are affected differently given their demographic characteristics and that this extends beyond the income level. It also differs depending on whether the household members take on the role of, for example, a consumer, a worker, or a business owner. While the direct price of a consumption tax places the largest burden on low-income households, as explained above, other types of households can also be heavily affected when, for instance, a worker’s income is decreased because his employer needs to pay more taxes and cannot afford to pay the same salary any longer. As a result, one should be aware that a tax can have both direct and indirect impacts. This applies, however, equally to the benefits of a tax. It has been argued, for example, that a carbon tax can also yield employment creation due to the development of a new economic sector.

What we can learn from this is that the effects of a carbon tax are multifaceted, but that environmental tax reforms and social progress are not necessarily contradicting factors. If short run negative impacts can be neutralized, the long run impact of carbon taxes is more often than not a positive one for society as a whole.

Tax competition

This blog is about tax competition between European Union member states. Many countries try to attract foreign firms by charging  low tax rates. In this blog, I try to give arguments why the tax competition between European member states to attract multinational firms should be prevented.

For a lot of countries such as The Netherlands a favourable tax regime is an easy way to compete with bigger countries in Europe. Countries that are attractive to especially American multinationals are Luxemburg, Switzerland and Ireland. Countries like Germany and France are not that dependent on favourable tax circumstances. These countries have a larger market they don’t only have more potential customers, but also more high educated personnel. By competing only on taxes governments do not compete on more complex areas like infrastructure. This has negative consequences for the economy.

At the moment, there is a division between the big countries and the smaller countries. The bigger countries want to stop the smaller fellow member states. The other countries are missing out on a large amount of taxes. There is a mismatch between the place where income is taxed and where the companies earn their revenue. Technology companies like Google are not required to pay taxes in all European countries since the European law only requires a corporation to pay taxes if these firms have physical activities in a country. For example, Google taxed their whole European income in Ireland.

Another argument against these tax wars is that the normal inhabitants of these countries are designated to pay the bill. The citizens have to bear the costs of the tax competition between the governments. Although, the governments have mutual agreements to don’t compete with fellow member states. Nobody really seems to respect these agreements. The European Commission has to do more to prevent the mutual tax war.

The national governments miss out on a lot of revenues. If they charged higher corporate taxes the government revenues would be a lot higher. The European agencies estimate the loss of taxes by the mutual tax competition on 50-215 million euro a year. The question is whether these firms compensate these lower taxes by contributing to the economy in another way. Governments have to examine how many jobs these firms generate.  An important function of taxes is to redistribute income between people in society. However, if firms earn a large part of the income in the complete economy the fundamental values of the taxing system are in danger. Citizens will lose their willingness to pay taxes if there are no measures.

By attracting businesses with very low taxes a very important argument the governments do not consider is that multinationals are dependent of the things that are done with taxes. Businesses need a good infrastructure, an educated work force and a good functioning government. Large multinationals are a one of the heaviest users of the benefits from the tax spending. Therefore, it is not logically they are not taxed proportionally to the benefits of the taxes.

Paternalistic taxation

Over the years, governments have implemented a variety of taxes with the intent of distorting the consumption of certain goods. A good example is the sugar tax imposed by the Portuguese government after the World Health Organization recommended countries to tax sugary drinks, to decrease their consumption. The idea is that by imposing a tax, governments are putting pressure for prices to go up and consumption to go down.

Any classical economist will say that consumers are rational and fully aware of the benefits and costs of all their choices and act accordingly. In that sense, the use of paternalistic taxes to limit consumption of certain goods would lead to a fall in welfare of consumers and therefore it would be best not to tax such goods. However, there is evidence to suggest that people do not behave as rational and make “mistakes” when choosing how much to consume, for example, of sugary
drinks. In such cases, government interventionmay be desirable to correct the overconsumption of unhealthy goods, in hopes that such correction improves individual and social welfare.

Ted O’Donoghue and Matthew Rabin (2006) have discussed the welfare effects of “sin taxes” on unhealthy foods. In their framework, they assumed that consumers do not have 100% of self-control, that is, consumers are aware of the immediate benefits of unhealthy goods but fail to recognize or neglect the long-run costs of such consumption. They concluded that, under these settings, imposing sin taxes and consequently returning the proceeds over to consumers can, in fact, improve social welfare and even create Pareto improvements (where no one is worse off and at least on consumer is better off). This field of behavioural public economics is expanding, and research done seems to point in the same direction. With consumers not behaving according to textbook rational choice models, there is room for government intervention to improve welfare.

From theory to practice, it isimportant to know how much consumption changed after a tax was imposed. Jason M. Fletcher, Partha Deb and Jody L. Sindelar (2009) have gathered data on adolescent to analyse the impact of cigarette taxes on smoking. They found that for smokers with lower levels of self-control are unresponsive to cigarette prices. This seems to suggest that low levels of self-control are linked with addiction, and that prices do not provide enough incentives to quit and that other policies should be put in place. On the other hand, according
to Jornal Economico, after the Portuguese government imposed a tax on sugary drinks, consumption went down 72%, suggesting that the tax was successful.

These results seem to be contradictory, with smoking results going against previous literature. However, it is important to remember that the unresponsiveness of smokers can be due to addiction and to the lack of substitutes, while a decrease in sugary drinks does not necessarily mean a decrease in sugar consumption. For any future policies, it is important to have these effects in mind.

Francisco Monteiro

Why the German reunification is one costly and still ongoing process

Exactly 27 years ago today on October 3, 1990 the German Democratic Republic, also called East Germany, joined the Federal Republic of Germany, known as West Germany, to form one nation. Realizing this project has always been a challenge and still remains one. 40 years of socialism had left traces, there were two German countries that had developed apart. Economic strength in the East reached only a third of that in the West, the difference in standards of living was clearly noticeable. This incline in prosperity within a reunified country was not acceptable, the development of equivalent living conditions became anchored as a goal in the German Constitution.

Out of this commitment, the federal financial equalization system arose. The idea was to ensure appropriate levels of funding among federal states through a multistage process, where tax revenues are distributed partially to the national government and to all federal state governments. Each of the latter receives their share in proportion to the number of state inhabitants and contribution to total tax revenues. “Financial equalization” takes place in the following step: Poor states receive adjustment payments from wealthier ones, financed through an additional tax called “Solidaritätszuschlag”. On top of this assistance among federal governments, the national government provides supplementary grants. The objective of such transfers was to help target states, particularly those in former East Germany, implement policies and adjust their economic strength or at least avoid a further diverge.

These regulations constituting the federal financial equalization system will expire by the end of 2019 and have long been subject to debates, most recently during the German federal elections less than 2 weeks ago. Every major party took up on the topic within their election program. Although there are different suggestions on how to execute an abolition of the tax, all agree on the fact that there shall not be any adjustment payments in the long run. There are many reasons for such unambiguous rejection of the current system. Over 25 years after the fall of the Berlin Wall, much has already been achieved.  The level of infrastructure in East Germany is high and often even better than in the West. In 2013, the states of Bavaria and Hesse mutually filed in legal action against the government, claiming the equalisation scheme to be unfair and discouraging economic performance after being donors ever since the regulations came into effect in 1991. There was further criticized that the system has drifted off the initial idea of helping Eastern states, since equalization is also applied on states in Western Germany that are poorer compared to the economically strongest regions. In fact, out of all 16 federal states, there are currently more states receiving payments than there are of those paying. This is even more problematic against the background that for years, the tax brings in more money than is actually spent on its purpose to increase living conditions, indicating an inefficient allocation of resources.

Behroz Sharifi

 

German “cash cow states” Bavaria, Hesse & Baden-Wurttemberg providing transfers to the rest. Each bucket represents another receiving federal state. The quote at the bottom says: “The financial equalizer is back”

Related to the topic:

• https://global.handelsblatt.com/finance/bailing-out-the-neighbors-683660
• https://www.imf.org/external/pubs/ft/wp/2009/wp09124.pdf
• https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Oeffentliche_Finanzen/Foederale_Finanzbeziehungen/Laenderfinanzausgleich/Eng-Der-Bundesstaatliche-FAG.pdf?__blob=publicationFile&v=1
• http://www.tandfonline.com/doi/abs/10.1080/13597560308559444

Child obesity – a public issue

Child obesity is a big and recognized issue of the world anno 2017[1]. Obesity in a young age will have consequences for the children now and in the future. It can lead to serious health issues for instance diabetes etc. for the individuals and thereby have large costs to the society[2]. Childhood obesity is a problem that the world needs to take care of. Often times the parents are responsible for the unhealthy living of the children and the obesity of them. There fore one must approach the parents. A way to do this and help the problem is to use monetary incentives and for instance having a tax on sugar-sweetened beverages. Studies show that the current level of sugar-sweetened beverage consumption in the US is doing real harm to the children, the families and the society[3].

Imposing a tax on the production of the sugar-sweetened beverages can prevent obesity, save lives, and reduce healthcare costs. The purpose of the tax will be to give the individuals incentives to stay away from the sugary beverages and thereby getting people to use healthier alternatives. A big problem about unhealthy, sugary beverages is that they can be cheap for the consumers, but a tax can make it more expensive for the consumers who will go to other alternatives. It will thereby serve as a powerful signal to reduce consumption through additional individual behavioural and policy changes. The study shows that imposing the tax on the beverages is a low-cost strategy that could also raise revenue. This revenue could be used in many ways for instance to learn people about health issues, healthy eating and physical activities. But for all of this to happen it is important that the tax is being created and imposed properly.

To set the right taxes the governments of the countries around the world, and especially in the countries that have high percentages of obese people, have a hard time to predict the consumer and producer behaviours after the introduction of a tax. Denmark introduced a tax on sugar in 2013, but it was quickly cancelled since it did not work after the intentions. A consequence of the sugar tax was that it also taxed goods that were not necessarily the reason. It is therefore important to create the tax in such a way, that it will increase the health of the individuals[4]. A way to avoid the problem like the one In Denmark is to for example tax the sugar-sweetened beverages and not sugar in general. Another question to ask is, if taxes are the way to get people to be healthier and give the healthy lifestyle to their kids. Knowledge about the consequences of an unhealthy lifestyle is an important factor as well and it is also important to have cheep healthy alternatives to the unhealthy ones.

Catrine Gravesen

[1] https://www.hsph.harvard.edu/obesity-prevention-source/2015/06/25/childhood-obesity-prevention-strategies-assessing-cost-effectiveness/

[2] http://choicesproject.org/publications/ssb-tax-summary/

[3] http://choicesproject.org/publications/ssb-tax-summary/

[4] http://borsen.dk/nyheder/ritzau/artikel/3/1549318/fakta_om_sukkerafgiften.html

What is behind the Unconditional Basic Income?

The Unconditional Basic Income (UBI) is an old idea which has returned to the political and economic debates. It brings together personalities as different as Bertrand Russell, Tobin , Elon Musk or  Varoufakis . According to Chohan, it is a “form of unconditional transfer payment to the entirety of the populace, without means testing or work requirements”.

The inspirations are obviously different. Nonetheless, we have to answer the following questions: firstly, what are the motivations for advocating for the UBI? Secondly, is it feasible and in which conditions can it be applied? Lastly, is it desirable?

There is a wide range of reasons that motivate this discussion. Van Parijs argues that the UBI is justified by the pursuit of “liberty and equality, efficiency and community, common ownership of the earth and equal sharing in the benefits of technical progress, the flexibility of the labor market and [by the] dignity of the poor”. Therefore, it is easy to see why the UBI might be defended by opposite sides of the political spectrum. One may claim that with the UBI everyone will receive an equal value which will provide people the freedom to make their own choices without being coerced by the state. Others may see in the UBI a way for workers to have a minimum level of conditions, to answer to technological changes and to reduce the asymmetry of bargaining power in labor relations.

Naturally, there are different ways to build the UBI. Following the OECD methodology, we can have a budget neutral UBI where the total amount of social transfers paid to inhabitants in the working age would be simply divided equally by each of them. As seen in fig.1, this would be far below the poverty line.  Alternatively, the UBI could target an amount equivalent to the guaranteed minimum-income benefits’ level or the current poverty line but this would have a negative impact on the budget which would generate a huge government deficit or, instead, a massive increase of taxes.  For example, for the USA, a UBI at the poverty line would cost about $2.1 trillion, equivalent to more than 13% of GDP.

Bearing all this in mind, it is time to ask the following question: is it desirable? In my view, a “liberal” UBI based on dividing the value of social transfers equally would be potentially disastrous socially and likely to contribute to increased poverty and inequality. Moreover, it would contribute to the decline of the welfare state. A more “generous” UBI could be equally tragic but at the level of public accounts and would not be the best allocation of government funds – just imagine if that increase in spending would be allocated progressively. To sum up, there might be many reasons to advocate for UBI but its implementation is a big challenge and, in the end of the day, it is not better than the current progressive welfare state.

Luís de Almeida, Masters in Economics, Nova SBE

In good times and in bad, in sickness and in health: A common Unemployment Scheme for European Citizens?

Nearly a decade of economic crises in Europe has shown how incomplete and vulnerable the institutional setting originally set up to create the monetary union is to country-specific shocks. Economists have long discussed the (dis-)functions of the Euro Area as an optimal currency area (OCA), a theory that describes the functionality of a common monetary system. The Euro has especially been criticized for its lack of means of fiscal policy, considered a vital for an OCA and essential to accompany monetary policy if asymmetric shocks remain across the area – and divergences during the Euro crisis have shown they do.

A frequently discussed tool that can contribute to this issue is a common European unemployment benefit system (EUBS), prominently favoured by the European Commission. Whereas an EUBS could take several forms – Beblavý and Lenaerts describe 18 alone – the basic structure remains the same: For citizens, an EUBS would work as a risk-sharing device very like the national schemes they know now.
For countries, however, an EUBS could work as a strong stabilizer in times of crisis that prevent further slumps in fiscally stressed situations as during the Euro crisis when a vicious cycle of economic downturns and austerity measures fed into each other – that an EUBS could help breaking.
If a country faces a sudden shock to unemployment, an EUBS would supply the unemployment benefits that would usually burden the state finances in a situation of crisis, freeing it from needs of fiscal tightening or even allowing it to pursue counter-crisis measures.

Even systems relative small in volume – 6-month duration and 30% benefit replacement rate – could bring along large stabilization benefits.
Such a tool would not only support a country’s domestic economy but also reduce economic fluctuations across Europe, fostering more stable growth. Furthermore, the implementation of an elaborate supranational system would force the convergence of national labour markets, promoting labour integration and mobility, another OCA criteria, on the way.

Besides economic gains, an EUSB would also have the potential to be a tool of European solidarity and identification.
A common EUBS would commit Europeans to a path of shared prosperity and stability, inciting a feeling of solidarity as peoples sharing a fate in good as in bad times. It would send a strong signal that the EU is not only an institution for global companies or educated people hopping between countries but a solidary union that devotes common resources and capabilities to support some of society’s neediest

Despite a general understanding and agreement on overall stabilizing, positive economic effects, it will face political upwind, amongst others, from Germany, as the Commission is well aware. Some Germans have long held the (rightfully doubtable) self-image of paying for the EU. Memories are short-lasted and not long ago, Germany was considered the sick man of Europe. Commission calculation’s show that Germany stands to benefit from an EUBS in times of downturns as much as any other country – not to speak of the benefits of a more stable political and economic environment.

Robin Bohn

Universal Basic Income: What to look for.

In the light of the technological changes occurring and the automation increasing, the idea of Universal Basic Income has been discussed for quite some time now. Universal or Unconditional Basic Income (UBI) is a periodic cash payment unconditionally delivered to all the citizens on an individual basis, without means-test or work requirement. Moreover, it is paid at regular intervals under an appropriate medium of exchange allowing those who receive it to decide what they spend it on. Therefore, it is not paid either in kind or in vouchers dedicated to a specific good or service.

 

In my opinion, there are two main arguments that stand out against this type of program: one is the affordability of this program, the cost objection. It states that the cost of providing everyone with a minimum reasonable income floor, under which no one would fall, is not achievable by governments. To do so taxes would have to be raised to unacceptable levels. The second argument is that there is resistance to just give money to everyone for not doing anything: the work ethic objection. This criticism has implicit that individuals given an Universal Basic Income would change their behaviour regarding their willingness to work.

 

Despite these two strong arguments, the Finish government is running an experiment with 2000 unemployed individuals (initially planned: 10000). These citizens are between 25 and 58 years old, and were randomly selected by Kela, the national social-insurance institute, to receive a basic income of 560€ per month during two years. It replaces their unemployment benefit and the selected individuals will continue receiving it whether or not they find work or earn any additional income.

 

There are some critics being pointed to this experiment regarding the sample size or even the fact that the sample is not representative as it only includes unemployed citizens. Therefore, some authors call it an unconditional unemployment benefit. Notice, however, that the main goal of the experiment is to test the work ethic objection referred to above. The goal, as stated by Kela, is to determine “whether there are differences in employment rates between those receiving and those not receiving a basic income.” The hypothesis is that people will accept job offers (typically with a low salary) that they otherwise would not as they then would lose their unemployment benefit.

 

The finish national social-insurance institute has no intention, at least in the first place, to study effects on other variables such as individual health and well-being. Nevertheless, many UBI recipients have reported “decreased stress and more time to pursue business ideas”.

 

Basic Income is an idea which is accepted by different ideologies from some liberals to left wing parties. Results on the current Basic Income trials, as well as its accuracy, which are only possible under a correct design of the experiment, can play an important role on the acceptance of this game-changing program.

 

The Danish media fee is regressive and should be changed

The Danish media fee has inequality consequences as it can be perceived as a regressive tax, meaning the poor pay a proportionally higher amount than the rich. This is argued in four parts, the first part being that the fee is in fact a tax on everybody. The second and third part is is related to why the tax is regressive. Finally, a common counter-argument is disqualified, before the post is concluded.

The media fee is not related to consumption, but is instead a tax on almost all Danish individuals, a tax framed by economists as being ‘lump-sum’. This is the case as the fee is to be paid by everyone with a TV or any device with access to the internet, which was 98% of individuals in 2016. As almost all are to pay, irrespective of their media consumption, the fee is effectively a tax on (almost) everyone.

The media tax is 330 euro annually irrespective of the individual’s income, wherefore it is regressive. Taking age-difference as an example, in 2015, people between 20–24 years had an average income of 14.100 euro annually, whereas people between 45–49 years had an average income of 39.000 euro. Thereby, the media tax constitutes 2.3% of a young persons income, but only 0.85% of a middle-aged persons income. The inequality consequences are not only in terms of age difference, but also between gender (men’s average income is 26% higher than women’s) and geographical regions (Northern Zealand’s average income is 35% higher than Northern Jutland’s).

Individuals in a couple and living together can share one tax payment, making the tax further regressive, as those with higher incomes also are more likely to live together as a couple. The inequality consequences becomes apparent with an example; a married (or unmarried) couple pays in total 330 euro for their household, whereas two friends co-habitating pay 660 euro. For the group of 20-24 years old mentioned earlier, only 32% live together as a couple, whereas for the richer individuals between 45-49 years, 64% lives together, and thereby gets the discount. As such, those who are already taxed a lower proportion of their income are more likely to receive the further discount of being able to split the tax with their partner, wherefore the regressive character of the tax is further enhanced.

To sum, the current media tax model is regressive. An argument for this model is that non-state financing ensures independent media. However, as the board of media institutions are largely politically elected, this argument seems redundant. As a matter of fact, 63% of Danish people agree to remove the media tax and fund media institutions directly through progressive income tax. The second largest party in Denmark advocate this solution as a ‘Robin Hood’ where ‘those with the broadest shoulders should bear the largest burden’. Other political parties should recognise the inequality effects, and change the model at the 2017 fall negotiation on media funding.