Pan-Canadian Perspectives: Go BIG or Go Poor? Is Canada Ready to be the Pioneer of the Basic Income Guarantee?

Editor’s Note: This week, the PPGR is publishing commentary articles from public policy and public administration students at universities across Canada. This Pan-Canadian Perspectives series is meant to highlight voices from coast to coast, addressing diverse issues of local and national importance. This article  from the West Coast: Rehnuma Jahan Islam from Simon Fraser University writes about why basic income may not be the best option to reduce poverty in Canada.

by Rehnuma Jahan Islam

Even with a relatively robust welfare system in place in Canada, many individuals still fall through the cracks and live in poverty: One proposed response has been to introduce a basic income guarantee (BIG) as a viable alternative to the complex welfare system. The literature is divided: proponents argue that it is necessary to reduce poverty and improving individual outcomes, while opponents point to the infeasibility and ineffectiveness of an unconditional cash transfer. The province of Manitoba conducted an experiment with a guaranteed annual income project, ‘Mincome’ from 1974 – 1979, funded jointly by the provincial and the federal government, with a budget of $17 million and expectation of enrolling over 1,000 families. The experiment died a quiet death in 1979 as costs spiraled out of control. Ontario has recently undertaken a basic income pilot project: providing a maximum of $16,989 per year to a single person, and $24,027 per year to a couple, which may not be enough to lift participating individuals above the poverty line.

Economists are skeptical of basic income’s “one-size-fits all” approach because poverty is a multifaceted challenge. Most tend to be concerned that BIG will create a negative incentive to work, and raise the effective marginal tax rates on the poorest Canadians. There are also unresolved questions relating to the cost of BIG, its political infeasibility, and the public’s low appetite for tax hikes.

Dis-incentivizing Effect on Labor Supply and Ineffective in Reducing Poverty

Although research based on the Mincome project found that the program did not have a significant effect on labour supply, the risk that BIG recipients might work fewer hours is supported by economic theory. In the worst case, BIG could create a long-term dependency on government transfers with far-reaching impacts. For instance, it might cause a spike in ‘under the table activities,’ to reduce amount of income reported to prevent reduction in benefits.

Exorbitant Effective Marginal Tax Rates

High marginal effective tax rates on incremental earnings, the loss of various cash and in-kind benefits as well as the payment of additional taxes are reasons why only 400 households have applied for the Ontario BIG pilot project. Lammam and McIntyre estimate what the total marginal effective tax rate would be for a recipient earning $17,787 in the various provinces under a hypothetical guaranteed annual income with a 50 percent reduction rate. After accounting for the federal and provincial income tax systems, the hypothetical marginal effective tax rate would be the highest in Quebec, at 78.5 per cent. Thus, basic income recipients would lose nearly 80 cents for each additional dollar they earn. The lowest marginal effective tax rate would be 70.1 per cent in both British Columbia and Ontario. The prospect of only retaining 20-30 cents of every additional dollar earned would discourage people from working longer hours and increase voluntary unemployment which ties back to the negative labor supply response.

Gargantuan Budgetary Costs and Possibility of Higher Income Tax Rates

The gross budgetary cost of providing a basic income averaging $10,000 per capita to Canada’s population of 35 million people has been A report released by the Fraser Institute estimates the existing income support system from all three levels of government to have cost $185.1 billion in 2013. Budget deficits would widen due to falling revenues, caused by higher voluntary unemployment rates. Subsequently, the government would need to increase income taxes in order to sustain its revenue,  leaving households with lower disposable incomes. Ironically, the end result of basic income could be an increase in the number of households below the poverty line.

Political Infeasibility

All levels of Canadian governments collectively spend 22.0 percent of program expenditures directly on cash and in-kind transfers for social benefits. Introducing a basic income would therefore require unanimous agreement from all levels of government in reforming about a quarter of total government activity in Canada. Institutions are extremely resistant to change, and partisanship of the citizens, the bureaucrats and the interest groups will play an important role in determining whether BIG is implemented or not. 

Conclusion

Poverty is a multifaceted problem and cannot be solved with a one-size-fits-all cash transfer like the Basic Income Guarantee. Even within vulnerable populations, poverty manifests with fluctuating degrees of severity. Children – for instance – are more vulnerable than adults to the negative effects that of poverty, and therefore deserve targeted consideration. Removing specialized programs that help vulnerable people fight the threat of poverty would worsen their plight, and undermine the fundamental objective poverty alleviation. Canada is not primed to be a trailblazer in the arena of basic guaranteed income. For policy makers and the electorate, the massive budgetary impact, the threat of higher income taxes, dis-incentivizing work efforts and exorbitant marginal tax rates will trump any arguments that are presented for BIG based on economic, philosophical or egalitarian grounds.

Rehnuma Jahan Islam is pursuing her Masters of Public Policy at Simon Fraser University. She is interested in using her training as an Economist and a Public Policy Analyst to help design and implement effective social, workforce development and trade policies.  She enjoys discovering new writers and is working towards her own library.

 

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One response to “Pan-Canadian Perspectives: Go BIG or Go Poor? Is Canada Ready to be the Pioneer of the Basic Income Guarantee?

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