Microsimulation studies of the funding options for Universal Basic Income (UBI) programmes are predominantly conducted using existing income tax and benefit systems, often with an assumption of budget neutrality. This Institute for Policy Research – Freiburg Institute for Basic Income Studies working paper, authored by Eric Qiao, explores the possibility of funding UBI programmes through indirect tax reforms, principally increases in VAT rates, coupled with reforms to social security benefits. It uses EUROMOD software and Household Budget Survey data (HBS) to model UBI schemes with different rates and target populations in the context of the 2019 tax and benefit system in Germany.

It finds that small increments to VAT rates can fund low levels of UBI, but that higher level programmes cannot be realised without significant VAT increases. Distributional progressivity is higher for UBI schemes that are funded by a combination of indirect and direct taxes, and which have higher levels of UBI.

The paper also examines additional UBI programmes targeted at sub-populations of children and young adults, which require smaller increases in VAT and/or direct taxes.