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Investment-Specific Technological Change and Universal Basic Income in the U.S.

Vedor, Bernardo (2022): Investment-Specific Technological Change and Universal Basic Income in the U.S.

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Abstract

Since 1980, income and wealth inequality increased gradually in the U.S.. Several solutions have been proposed, namely the introduction of a Universal Basic Income (UBI) system. In order to assess whether a UBI financed by a progressive labor tax is a viable solution to reduce inequality, we develop an overlapping generations model, with multiple sources of technological change and four different occupations. Calibrating the model to the U.S. we find that the welfare-maximizing level of UBI is actually quite low, 0.5% of GDP. Even though a higher UBI would decrease income and wealth inequality, it would negatively affect economic efficiency and make all types of agents worse off. The main mechanism is the distortionary effect of higher labor income taxation on capital accumulation which prevents the economy from incorporating the gains from investment-specific technological progress.

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