The Political Sustainability of a Basic Income Scheme and Social Health Insurance

This paper studies how society votes on the payroll taxes of a
basic income and a social health insurance scheme. Individuals
differ along the two most important dimensions when it comes to the
design of the two welfare schemes, namely, income and risk. Even
though the introduction of a basic income scheme opens up the
possibility for additional redistribution, it also crowds out
social health insurance. We show that when both welfare schemes are
open for debate, the political equilibrium is such that only the
basic income scheme prevails. At the constitutional stage we
determine which welfare scheme society agrees to implement behind
the veil of ignorance and with a Rawlsian objective. Since social
health insurance not only redistributes income from rich to poor
but also from low-risk to high-risk agents, the doubly
disadvantaged in society – low-income and high-risk agents – may
lose out in the political process when a basic income scheme is in
place. Depending on the amount of health care expenditure and the
inequalities in income and risk, it may well be that a society will
find it optimal to set up an institutional framework for a social
health insurance scheme only.