Specifically true in the context of tax policies as funding.

The aim of this paper was to assess tax policy reforms that can sustain universal basic income programs and foster long-term growth and welfare in an African currency union that faces fiscal constraint and inequality. Theoretically, the relationship between tax policy and universal basic income remains unsettled. The proponents of a universal basic income program advocate four fundamental development principles. By contrast, the opponents of the universal basic income program challenge those four development principles. To address this ongoing debate, we developed a Dynamic Stochastic General Equilibrium Model of universal basic income enriched with three fiscal policy strategies. We model the fact that, to alleviate inequality and raise long-term growth and welfare, government members adopt a universal basic income program, which is financed by three fiscal policy strategies. The first fiscal policy strategy is the increase in taxes on realized capital gains. The second is the expansion of corporation income tax. The third is the total phasing-out of the oil subsidy program within the currency union.

The findings show that the effectiveness of universal basic income on productivity growth, inequality, and welfare is dependent on the type of fiscal policy used to fund it, specifically the trade-off between tax policy and transfer policy. While universal basic income funded by tax policies is effective in reducing inequality and increasing growth and welfare, universal basic income funded by completely eliminating oil subsidies appears to be the best policy in terms of growth, welfare, and inequality reduction. Hence, to influence long-term productivity growth, welfare, and inequality via universal basic income within the monetary union, the government will face a trade-off between expanding the tax base and reducing public spending. Second, when the currency union faces an oil crisis, a universal basic income funded by tax policy is more effective in combating stagflation and inequality than a universal basic income funded by oil subsidy elimination. So, oil subsidies appear fundamental in supporting economic activity and welfare when the currency union is in a crisis situation. This is because, by raising taxes on corporates and higher-income households, the government uses those fiscal revenues to fund subsidies and policies that directly target low-income households and reduce inequality between low-income households and high-income households. Third, the normalization of monetary policy following the inflation crisis leads to two opposite effects. On the one hand, universal basic income is more effective in reducing consumption inequality since lower-income households consume more and save less due to monetary policy normalization, more so under the third fiscal policy, rather than the second and first fiscal policies. On the other hand, universal basic income is unable to circumvent income inequality due to lower growth and lower employment induced by the normalization of monetary policy, more so under the third policy rather than the second and first fiscal policies.

The welfare analysis reveals that, when the currency union faces a crisis, universal basic income funded by increases in both taxes on corporate gains and taxes on corporate income appears as the optimal fiscal strategy rather than universal basic income funded by oil subsidy elimination. So, a universal basic income funded by enlarging taxes is optimal compared to a universal basic income funded by reducing public spending when the economy is hit by a severe crisis.

Specifically, the first set of results of this welfare analysis suggests that, while universal basic income funded by the first tax policy is successful in reducing income inequality and consumption inequality and improving households living standard, its effects lead to higher welfare gains when the economy faces crisis rather than the economy in normal time. The second set of results suggests that, while universal basic income is effective in reducing income inequality and consumption inequality and improving households living standard, its effects lead to higher welfare gains when it is funded by an increase in tax on capital gains rather than when it is funded by an increase in taxes on corporates income. The third set of results suggests that, universal basic income funded by the total phasing-out of oil subsidies is less effective when the currency union is under crisis, its effects lead to the highest welfare loss relatively to universal basic income funded by increases in taxes. Four core policy implications come-out from this analysis:

First, expanding the tax base is necessary in resource-rich countries for long-term growth and redistribution.

Second, universal basic income is an effective tool to enhance welfare in Africa and other less developed countries.

Third, well-targeted government transfers or subsidies are necessary to reduce inequality between lower and higher-income households.

Finally, fiscal policy can serve as a means to raise welfare and reduce inequality in most countries.