Andrew Abballe and Jonathan Kates
If you’ve been following any discussion of 21st century economic adaptation, you’ve likely come across the term “universal basic income” (UBI). This is the concept that every person in a given jurisdiction will receive a minimum weekly or monthly payment, regardless of how much they work, or any income they may already have. The UBI – sometimes referred to as a guaranteed basic income or annual basic income – is a topic that’s been covered on this blog more than once (see here and here). Proponents of a UBI, including Tesla founder and CEO Elon Musk, assert that a UBI will become necessary as precarious work becomes the norm, but critics claim that it is too costly and will disincentivize work by handing out free money.
With the exception of New Democratic Party leadership candidate Guy Caron’s interest in the idea and an early-stage pilot in Ontario, the Canadian political landscape doesn’t appear to be interested in a social welfare program that so closely resembles “free money”. Implementation of a full-scale UBI in Canada is years, maybe even decades, away.
But the ‘welfare wall’ is real. In Canada, low-income individuals who move off of welfare and into the labour market not only lose out on numerous government benefits, but are also subject to a new range of taxes. This discourages low-income individuals from entering the labour market. While a UBI in Canada is unlikely to occur any time soon, either a negative income tax or a working income tax could and should be implemented in the short-term. In the meantime, UBI will have the opportunity to gain the social and economic traction it needs to be successfully implemented.
Negative Income Tax
Though never implemented, the concept of a negative income tax (NIT) has existed since the 1940s, following its introduction by British politician Juliet Rhys-Williams. In the 1960s it was brought to wider attention by famed economist Milton Friedman. Friedman thought that the NIT could replace the cumbersome welfare state model of “bandaid policies” and grants that existed at the federal and provincial levels. Oftentimes, the existing model disincentivizes individuals to work because of the claw back of benefits that occurs when a certain income level is reached. For example, here in Ontario, parents who are entitled to receive child support payments and one of Ontario Works or the Ontario Disability Support Program are inclined to forgo one entirely to ensure that the other is not clawed back. That is, in order to protect its perception to the public that is not simply giving away free money, the government disallows welfare recipients from “double dipping” in two programs, but this creates problems of administrative and financial burden. An NIT could replace this possibility by eliminating all of the above programs and ensuring that no individual’s (or family unit’s) income falls below a certain threshold.
Although there are multiple models of an NIT, the simplest form is a flat tax NIT, which means that everyone in the economy will pay the same income tax rate and be entitled to a minimum benefit, regardless of how much income they earn. For the sake of example, let’s say that the credit is $10,000. Below are some examples of what that tax or benefit would amount to at different income levels.
|Earnings||25% Tax Rate||$10,000 Credit||Total Tax/Benefit|
Despite the regressive nature of this model, it has a number of advantages that make it attractive to politicians and the public. First, everyone will know exactly what their tax rate is and how much they can expect to pay or receive in a given year. Second, the implementation of such a policy would require a re-write of the Tax Act, which would give the government the opportunity to close the various tax loopholes that currently cost the Canadian economy billions in lost revenue. Re-capturing those lost wages would go a long way to assuage any public concern that high-income individuals are getting an easy ride. Additionally, a much simpler tax system has the potential to produce fiscal efficiencies by reducing the bureaucracy currently required to process tax filings and act on any discrepancies.
Working Income Tax Benefit
Another potential option is expanding the Working Income Tax Benefit (WITB), which was developed in 2007 by the Harper government and was modelled after the Earned Income Tax Credit (EITC) in the United States.
The WITB was designed with three distinct benefit levels intended to smoothly integrate individuals into the workforce. The benefit levels differ for couples or families with children, and single individuals. The following are benefit levels for the 2015 taxation year:
1) Canadian residents become eligible for the program once they begin working and earn a minimum annual income of $3,000. Their income is supplemented by a 25 per cent refundable tax credit for every dollar they receive over $3,000.
2) The benefit plateaus once individuals reach a maximum benefit level. This is $1,844 or $10,375 of working income for couples or families with children. Likewise, the benefit plateaus at $1,015 or $7,060 of working income for single individuals.
3) Once a family or individual continues to earn more income they reach a maximum threshold. As a recipient’s net income exceeds this point, the benefit begins to decline and is phased-out at a rate of 15 per cent until it is fully clawed back.
This phase-out threshold for couples or families with children is $15,915 and they are completely taken off the benefit once they reach an income of $28,209. Single individuals have a phase-out threshold of $11,525 and are taken off the benefit once they reach an income of $18,292.
Due to the fact that the WITB is relatively new and small in scope, researchers have been unable to adequately evaluate the program’s effectiveness in Canada. However, evidence from the United States demonstrates that the program can be successful in achieving its objectives of incentivizing individuals into the workforce and reducing poverty. According to the Center on Budget and Policy Priorities, the EITC lifted 6.5 million people out of poverty in 2015.The biggest challenges that both of these programs face is ensuring that eligible taxpayers are aware of the benefit and that they claim it on their tax returns.
Increasing the scope of the WITB has received cross-party support in Canada. The program can be expanded in numerous ways, including increasing the maximum benefit level or extending the phase-out rate. While it is not a silver bullet solution for ending poverty, it could assist those who have been displaced into precarious and low-wage work by automation and globalization.
With income inequality rising and technological automation on the horizon, several jurisdictions have begun to seriously consider UBI. While the program has been praised for its simplicity, critics have pointed out that it is too costly, and also provides disincentive to work.
According to University of British Columbia professor Kevin Milligan, a UBI would “simply pay out big cheques to those who don’t need them, doing little to help those who are struggling. Not only would this plan be unimaginably expensive, but it’s hard to see why there would be any social gain that would begin to offset the costs.”
As artificial intelligence becomes increasingly sophisticated and threatens more jobs, a UBI system may indeed be necessary in the distant future. In the meantime, we should explore other programs that have the potential to help transition individuals into the labour force and enhance the living standards of the working poor.
A previous version of this article did not make mention of Ontario’s Universal Basic Income pilot, which is set to launch in 2017.
Andrew Abballe is a 2017 Master of Public Policy candidate at the University of Toronto’s School of Public Policy & Governance. He holds an Honours Bachelor of Arts in Ethics, Society, & Law and International Relations from the University of Toronto. His policy interests include economic, education, social policy and innovation. You can usually find him drinking an espresso in one of Toronto’s many cafes.
Jonathan Kates is a 2017 Master of Public Policy candidate at the University of Toronto’s School of Public Policy & Governance, and he holds a bilingual Bachelor’s degree in International Studies and Sociology from Glendon campus at York University. His policy areas of interests are cities, social policy, innovative approaches to governance and service delivery, and how individuals are influenced by their environments. When not perusing the internet, Jonathan is probably checking his fantasy basketball team…ok, teams.