The political sustainability of a basic income scheme and social health insurance

• DOI: http://doi.org/10.1111/jpet.12320
• Date: 01 December 2019
• Published date: 01 December 2019
• Author: Kerstin Roeder,Mathias Kifmann

Received: 15 November2017 Accepted: 13 June 2018

DOI: 10.1111/jpet.12320

ARTICLE

The political sustainability of a basic income

scheme and social health insurance

Mathias Kifmann1Kerstin Roeder2

1Departmentof Socioeconomics, Hamburg

Centerfor Health Economics, Universität

Hamburg,Hamburg, Germany

2Departmentof Economics, University of Augs-

burg,Augsburg, Germany

Correspondence

KerstinRoeder, Department of Economics, Uni-

versityof Augsburg, Universitätsstr. 16, 86356

Augsburg,Germany.

Email:Kerstin.Roeder@wiwi.uni-augsburg.de

Abstract

This paper studies within a two-stage framework the political

economy of a basic income (BI) and social health insurance (SHI)

scheme. At the constitutional stage, individuals decide whether

these schemes are implemented behind a veil of ignorance about

their future income and risk type. This decision is made in anticipa-

tion of the outcome at the second stage in which individuals vote

on the payroll tax to finance a BI and the contribution rate of a SHI

scheme provided these schemes have been implemented. Depend-

ing on the amount of healthcare expenditure and the inequalities

in income and risk, only a social health insurance scheme is imple-

mented at the constitutional stage.

1INTRODUCTION

A basic income (BI) is a government-provided cash paymentthat is paid unconditionally to all citizens on an individual

basis without a means test or work requirement. It is a lifelong, guaranteed payment that, as is postulated by most

proponents, should be large enough to satisfy an individual's basic needs. Various synonymsfor a BI have entered the

political discussion, for example, state bonus, social dividend, guaranteed income, citizen's wage, citizenship income,

existence income, or universal grant. Other similar policy measures that all share the idea of providing a “guaranteed

income” to every citizen havebeen revisited, for instance, Milton Friedman's negative income tax (Friedman, 1962), or

Tob in 's demogrant (Tobin,Pechman, & Mieszkowski, 1967).1

The philosopher and political economist Philippe VanParijs is one of the most prominent advocates of a BI scheme

of our time.2He argues that a BI is an effective and equitable solution to poverty,which not only promotes individual

freedom but also leaves the beneficial aspects of a market economy in place (VanParijs, 2004). In January 2014, the

European Citizens Initiative collected 285,042 statements of support for a basic scheme within the European Union.3

Even though this number of signatures is too low to prompt the European Commission to examine the initiative care-

fully and arrange for a public hearing in the European Parliament,the initiative shows that the idea of a BI is part of an

1Forinstance, under the negative income tax system, each person with an income below a certain threshold would receive supplemental pay from the gov-

ernmentinstead of paying taxes. See http://www.basicincome.org for an overview of the different ideas.

2In the 1980s, supporters of such a scheme set up the Basic Income European Network (BIEN), which publishes a regular newsletter and organizes confer-

encesevery 2 years.

3Forfurther information, see http://basicincome2013.eu/en/index.html.

Journal of Public Economic Theory.2018;1–20. wileyonlinelibrary.com/journal/jpet c

2018 Wiley Periodicals,Inc. 1

ORIGINAL ARTICLE

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2KIFMANN ANDROEDER

ongoing and lively debate on the future of the welfare state. And it was only recently,in June 2016, that a referendum

was held about the introduction of a BI in Switzerland, but a majority of 78% voted against its introduction. So until

now no country has ever introduced a full BI scheme.4

At present, in many developed countries the institutional framework is such that income redistribution is attained

through social insurance schemes, in particular through social health insurance (SHI). SHI entitles citizens to health

benefits when sick. The first scheme was introduced in Germany in 1883 as part of Bismarck's social insurance legisla-

tion. Since then, manycountries have adopted similar schemes. They are typically financed by income-related contribu-

tions and thereby not only redistribute from those with a good health status to those with poor health status, but also

from high- to low-income earners. By combining these two dimensions of redistribution, SHI receives political support

from two groups, those with poor health status and those with low income. As individuals with poor health status can

be expectedto be in a minority, support by the financially poor can be crucial for the existence of SHI if public provision

is not exclusive (see Kifmann, 2005; Nuscheler & Roeder,2013; or De Donder & Pestieau, 2017, for an application to

long-term care).

Most advocates of the BI scheme regard it as complementary to SHI (see, e.g., Atkinson, 1996a; Van Parijs,1992),

whereas others envision it as a substitution. From a political economy point of view, however, the crucial question is

to what extent both income-redistributing systems can receive political support. The introduction of a BI scheme is

likelyto have an impact on the level of SHI. Some groups may favor the BI scheme, in particular those who benefit from

income redistribution but not from redistribution in the health dimension. This can create downward pressure on SHI

expenditure. Considering that everyone is at risk of developing a poor health status, such a weakeningof SHI can be

problematic and should be considered in the decision to introduce a BI scheme.

In this paper,we analyze this question in a two-stage framework. In the first “constitutional” stage, society votes on

whether an SHI and/or a BI scheme should exist.In the second stage, individuals vote on the flat income tax rate that

finances the BI scheme and/oron the SHI contribution rate financing the level of public healthcare benefits. Individuals

differ in the two most important dimensions when it comes to the design of the two welfare schemes, namely income

and health risk. At the constitutional stage, individuals anticipate the possible voting outcomes at the second stage,

but they are assumed to adjudicate as if they were behind a “veil of ignorance” about their own preferences. In other

words, the decision on which welfare scheme(s) will be implemented is made in a state of uncertainty. Individuals do

not yet know their income and risk type, but have common knowledge of the distribution of types and thus know the

probability of becoming a specific type.

A similar two-stage framework has been applied before in the context of industrial policy and the design of wel-

fare schemes (see, e.g., Atkinson, 1996b; Boyer & Laffont, 1999; Casamatta, Cremer,& Pestieau, 2000; Laffont, 1996).

Like Casamatta et al. (2000), who study the redistributive design of social insurance systems, we use the constitu-

tional approach to capture the difference between the basic design of welfare state institutions and the decisions made

within this framework. At the constitutional stage, decisions are made with a long-term perspective that includes fun-

damental decisions about the welfare institutions. At this stage, it is not yet clear whether individuals will be net payers

into or receivers from the welfare state. The size of welfare schemes, on the other hand, is a more frequently debated

issue and is settled through a continuing political process. At this second stage, individuals have learned their income

and risk type and know whether they will be net payersinto or beneficiaries of the welfare scheme(s) in place. The con-

tinuing political process is thus governed by the concrete interests of members of society,which may differ from their

objectives at the constitutional stage.

We follow Casamatta et al. (2000) by considering MaxiMin preferences and expected utility at the constitutional

stage and majority voting at the second stage.5At the constitutional stage, individuals will unanimously agree on the

choice because they decide behind a veil of ignorance. At the second stage, the policy space is two-dimensional if the

4Alaska has a partial BI scheme. Since 1982, everyonewho has been officially resident in Alaska for at least 6 months is considered to be a part owner of the

state'soil resources and receives a uniform dividend (in 2013, $900) from the Alaska Permanent Fund every year; see http://www.apfc.org.

5Maximin preferences reflect the difference principle of Rawls (1971). Analyzing the introduction of a BI scheme by applying Rawl's difference principle is

alsosuggested by Van Parijs (1991).

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