Brazil's Broken Welfare System: Is a Universal Basic Income the Answer?

:::info Authors:

(1) Rozane Bezerra de Siqueira, Department of Economics, Centro de Ciências Sociais Aplicadas, Universidade Federal de Pernambuco, Av. dos Economistas s/n, Recife-PE, CEP 50740-580 (rozane_siqueira@yahoo.com.br);

(2) José Ricardo Bezerra Nogueira, Department of Economics, Centro de Ciências Sociais Aplicadas, Universidade Federal de Pernambuco, Av. dos Economistas s/n, Recife-PE, CEP 50740-580 (jrbnogueira@yahoo.com.br).

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Table of Links

Abstract and 1. Introduction

1. UBI schemes analysed and method

2. Fiscal effects

3. Distributional effects

   4.1. Poverty and inequality indicators

   4.2. Distributional effects in terms of winners and losers

4. Conclusion and References

\ (July 2021) [1]

\ ABSTRACT: The outbreak of the Covid-19 pandemic has led to an increasing interest in Universal Basic Income (UBI) proposals as it exposed the inadequacy of traditional welfare systems to provide basic financial security to a large share of the population. In this paper, we use a static tax-benefit microsimulation model to analyse the fiscal and distributional effects of the hypothetical implementation in Brazil of alternative UBI schemes which partially replace the existing tax-transfer system. The results indicate that the introduction of a UBI/Flat Tax system in the country could be both extremely effective in reducing poverty and inequality and economically viable.

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1. Introduction

Over the past few years, interest in Universal Basic Income (UBI) proposals has grown enormously across the world. Gentilini, Grosh and Yemtsov (2020), in a chapter of a book on UBI published by the World Bank (Gentilini, Grosh, Rigolini and Yemtsov, 2020), remark that over the last decade alone 91 books were published on the subject, and several pilot programs were implemented around the world. More recently, the outbreak of the Covid-19 pandemic substantially increased the interest on UBI proposals, as it exposed the inadequacy of traditional welfare systems to provide financial security to large segments of the labour market, particularly self-employed workers and small business.

\ A UBI is usually conceived of as a regular fixed amount of money provided by the state to every citizen, regardless of income level, employment status or any other conditionality. The only limiting condition permitted would be the recipient’s age. The notion dates back to the 18th century and was introduced by Thomas Paine (1797). In the second half of the last century interest in the idea was renewed with James Buchanan (1960, 1967), Milton Friedman (1962), and James Tobin (1967). In the 1990’s a new wave of academic work on UBI was initiated with key authors such as Philippe van Parijs (1992), James Meade (1993), and Anthony Atkinson (1995).[2]

\ The upsurge of interest in UBI proposals in the last decade emerged initially in advanced countries, motivated to a great extent by growing inequality and rising job insecurity associated with technological progress (particularly, automation) and globalization. But proposals also proliferated among developing countries, where the limitations of the existing social protection systems to reducing extreme poverty and inequality tend to figure prominently among the motivations for implementing a UBI.[3]

\ With the Covid-19 pandemic, awareness of the fundamental role a UBI may have in such a context is increasing among both developed and developing countries. As a response to the dramatic negative impact of the pandemic on the economic circumstances of households, several countries have enacted emergency cash transfer programs. In Brazil, more than 70 million individuals, corresponding to more than 40% of the working age population, have applied to receive the emergency cash benefit created by the federal government in order to mitigate the effects of household impoverishment during the pandemic crises.

\ Notwithstanding the existence, since 2004, of a law which establishes a UBI to be progressively implemented in the country, the so-called Lei de Renda Básica de Cidadania (Citizen´s Basic Income Law), until the coronavirus pandemic no movement had been made in this direction. This law was proposed by Eduardo Suplicy, a federal senator in the Brazilian parliament from 1991 to 2015, who campaigns for the introduction of a UBI in Brazil since the early 1990s.4 However, since the enactment of the law till recently, the political debate on the subject had faded. A major reason for this is the belief that a UBI is not fiscally sustainable in the long run and that the existing conditional cash transfer programs are more adequate to fight poverty and redistribute income. [5]

\ The purpose of this study is to use a static tax-benefit microsimulation model to analyse the fiscal and distributional implications of the hypothetical implementation in Brazil of three alternative UBI schemes which partially replace the existing tax-transfer system. Two of the schemes considered are versions of the so-called ‘basic income/flat tax proposal’, which combines a universal transfer with a single-rate tax on all other incomes. The third scheme allows for a progressive tax structure.

\ Given the inequitable and fragmented nature of the Brazilian social protection system, one can expect, beforehand, that a move to a UBI would improve welfare. Despite a high level of spending on social protection, Brazil is one of the most unequal countries in the world and extreme poverty is still widespread, particularly among children. A study published by the Brazilian Ministry of Economy (MF, 2017) reports, for instance, that in 2015 public cash transfers represented 23% of total household income, but the absolute amount paid to the richest 20% of the population was ten times as high as that paid to the 20% poorest.6 To a great extent this reflects the country’s highly dualistic benefit structure, with generous pension regimes and relatively low provisions to poor families with children.

\ In this context, a UBI reform has the potential to deliver significant equity improvements at a sustainable financial cost, as the government can (in principle) offset a substantial proportion of UBI’s gross cost by adjusting existing benefits’ levels downwards. Additionally, UBI schemes such as those considered in this study have some advantages over the current tax-transfer system which are related to their universal, simple and transparent nature. This includes the reduction in bureaucratic costs and the minimization of opportunities for manipulation of the system by vested interests, as well as the promotion of a sense of citizenship and social cohesion.

\ To the best of our knowledge, there are only three studies that estimate the distributional effects of implementing a UBI in Brazil: Siqueira (2001), IMF (2017), and Rigolini et al. (2020). The latter two are in fact cross-country comparative studies and do not attempt to provide any countryspecific result on the desirability or feasibility of a UBI. In particular, IMF (2017) does not consider any compensating scheme to make the UBI reform revenue neutral, while Rigolini et al. (2020) simulates changes in the social assistance system only, with all existing contributory benefits and pensions excluded from the analysis. By its turn, Siqueira (2001) provides a detailed distributive analysis of hypothetical UBI reforms in Brazil, but the simulations do not allow for any change in the current transfer or tax systems. In these cases, reported fiscal and distributional effects can significantly diverge from those derived from a more comprehensive approach which considers the introduction of a UBI along with reforming the existing tax and transfer systems.

\ The structure of the paper follows. Section 2 outlines the details of the alternative UBI systems simulated in this study and briefly describes the simulation method. Section 3 examines the fiscal implications of the reforms. The distributional effects of each reform are analysed in Section 4. Section 5 concludes.

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:::info This paper is available on arxiv under CC BY 4.0 DEED license.

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[1] Version prepared for presentation at the 22nd Basic Income Earth Network Congress, 18th -21st August 2021.

\ [2] For a full review of the origin, developments, and key issues concerning UBI, see Van Parijs and Vanderborght (2017) and Gentilini et al. (2020).

\ [3] Hoynes (2019) provides a discussion on the implementation of UBI in advanced countries, while Banerjee, Niehaus, and Suri (2019) discuss UBI in the context of developing countries.

\ [4] Suplicy (2013) describes the author’s proposal and engagement for a UBI in Brazil.

\ [5] For a more detailed discussion of issues preventing the practical implementation of the Lei de Renda Básica de Cidadania, see Lavinas (2013).

\ [6] In OECD countries, according to MF (2017), public transfers account for around 21% in average of total household income.