The numbers used here to demonstrate a form of guaranteed minimum income are illustrative. Brighter minds at Canada’s Department of Finance I am sure could calibrate the minimum income, tax credit, and tax rate to optimise incentives to work, government financial savings, and societal outcomes. That said, here is my stab at it!
The average minimum wage in Canada was around $13.00/hour in 2019, meaning that someone working 7 hour days at a full-time job, with 15 days vacation and statutory holidays would earn nearly $21,400 a year. This is 59% of Canada’s 2019 median annual income of $36,400 or 45% of the average annual income of $48,000. Meanwhile, the Canada Emergency Response Benefit (“CERB”) provides $500 a week, equating to an annualised $26,000 or almost $16/hour.
Some have argued that the CERB should become permanent as a form of Universal Basic Income (“UBI”). However, with the CERB paying more than working full-time at the average minimum wage, this would incentivise minimum wage earning Canadians to cease working as they could earn more through the CERB.
If the CERB is not the solution for a made in Canada UBI, what is? One way to provide an income floor for Canadians that does not disincentivize work and ensures that those Canadians with higher incomes don’t benefit, is to use the income tax system to create a Guaranteed Basic Income (“GBI”). It would work like this:
- Basic Personal Exemption — The basic personal exemption would be set near the income earned by median worker, currently around $33,090. This would mean nearly 50% of workers would pay no income tax, while ensuring that Canadians still contribute financially for the government services they receive regardless of income level via GST. (Stay tuned for my next blog about reforming the tax system for more simplicity and fairness).
- Refundable Tax Credit — A refundable tax credit of 55% of the basic personal exemption would top up the wages of low-income earners and would mean that someone with no income would get a tax rebate of $18,200 ($33,090 X 0.55), equating to a full-time wage about $11.06/hour. The refundable tax credit would create a negative income tax for low income workers where the tax credit decreases as incomes increase, with no credit given once income equals $33,090. This means that lower income Canadians benefit from the credit, which creates an income floor for Canadians of $18,200.
- Flat Tax — All income above $33,090 would be taxed at a flat 45%, which is not as high as it may appear. For instance, someone earning $33,090 would pay no income tax; at $50,000 of income, $7,610 in income tax would be due (15% of income); at $100,000 of income, $30,110 would be due (30% of income); and someone earning $200,000 would pay $75,110 in income tax (38% of income).
Looking at how this proposal works demonstrates how lower income Canadians benefit from the refundable tax credit, meaning no adult Canadian would earn less than $18,200 — in effect an income floor.
The system also ensures that the more you earn/work, the more is left in your pocket. It also maintains progressivity, where the more you earn the greater the share of your income is paid in tax. Because of the large basic personal exemption and the flat 45% tax on income above that level, the effective tax rate on incomes approaches 45% at $2m of income, however, anyone earning over $275,000 would expect to pay 40% of their income in income taxes.
Importantly, child benefits such as the Canada Child Benefit would remain in place. The reason child benefits are not included in this GBI proposal is due to the challenge of creating a GBI that takes into consideration very different family structures. Retaining the Canada Child Benefit ensures that low income families are able to properly support their children. The current benefit can be as much as $6,639 per child, making a significant difference to low income families with payments reduced as family income increases.
With many Canadians currently receiving a form of UBI, be it either through old age support programs, the Covid related CERB, Employment Insurance, or welfare it will be a real challenge for governments to roll these programs back once the economy returns to normal. It is often said in politics that it is much easier to create a program than to eliminate one. Once people are used to getting a benefit they tend to punish politicians that take it away. Regardless of the current political and economic situation, there are strong economic and social reasons for Canada to consider this GBI proposal.
While it could be argued that a GBI of $18,200 might prove to be a disincentive to work, this only equates to $1,517 a month, which most Canadians would struggle to live on. Using the GBI approach also means that someone currently not working and outside the labour market who decides to take on 20 hours of paid work at $15 an hour for about 15 hours a week, will be much better off financially than not working. They would earn $30,000, benefit from a tax credit of $1,700, leaving them with no income tax to pay and total after tax income of $31,700, which 174% more than not working.
Canada is currently experiencing a labour shortage, which is forecast to get worse in the coming decades. Recent research from the Business Development Bank of Canada predicts that labour market growth in Canada out to 2030 will be near zero, this includes the impact of immigration. What this means is that as baby-boomers retire, there will just barely enough Canadians and new immigrants to replace them. Surveys of Canadian businesses also found that 40% have difficulty finding new workers.
So how does this UBI proposal help with labour shortages? It removes some of the cliff-edge that occurs when people on welfare or income supports work. It has been documented by researchers that the complexity of income supports often result in the perverse outcome where the recipient is better off on ‘benefits’ than working. In some cases for every additional $1 earned from work the individual loses more than 75% of benefits, reducing the incentive to work, with some benefit recipients losing more benefits for every dollar earned than they generate through employment income. This is not a recipe for getting people into work and off of social benefits.
Using the tax system to create a GBI where the effective loss of benefits is $0.45 for every $1.00 earned, brings the effective ‘tax’ in terms of loss of benefits in line with the 45% flat tax on higher levels of earned income. By changing the incentives to work and reducing the cliff-edge of losing income supports, a GBI should encourage more people to work, which will help address Canada’s labour shortages.
Research has found that forms of universal basic incomes and GBIs reduce workforce participation. While this may be socially beneficial for new parents or those taking care of sick family member, generally income supports should encourage work. Structuring a GBI in a way that enables lower income workers to keep a large amount of the tax credit, the incentive to work should be high versus any incentive to remain outside the labour market earning $18,200 a year. This GBI proposal meets these criteria.
Canada has long suffered from lower labour productivity than the US, which depresses wages and reduces the economic wellbeing of Canadians. Canada currently ranks 18th of major developed economies in GDP per hour worked at $50.90 versus $68.30 in the US and $65.50 in Germany. The impact of this productivity gap is lower wages for Canadian workers. This explains why GDP per capita for the US is over 40% higher than Canada’s.
This GBI proposal could help drive companies to invest to drive improvements in productivity. By setting an effective wage floor of $18,200 or about $11/hour, employers would be incentivised to invest in training, technology, and equipment to ensure that workers they hired generated more than $11/hour of output. This would be required as wages would need to be greater than $11/hour to icentivise people to work under versus collecting the maximum GBI.
Canada has lagged behind the G7 average in terms of business investment and productivity growth for several years. By pushing employers to offer higher wages, which will prompt them to ensure that their employees are more productive will help address this. Increasing labour productivity will also help address the existing and coming labour shortages. However, generating more output per worker can have the impact of reducing demand for labour.
While appearing counterintuitive, why would Canada want to have a GBI that could reduce demand for labour for every dollar of GDP? Because we are currently facing a shortage of labour and countries that are more productive have stronger GDP growth and higher wages, which improve the economic prospects of workers, families, businesses, and governments.
A likely end result from this GBI will be higher wages, which will benefit workers. However, higher wages usually also result in less demand for labour. Economic theory predicts that the more something costs the less of it gets used. Well in Canada’s situation, higher wages that drive businesses to invest in productivity enhancing technology, training, and processes should help solve coming labour shortages, drive up GDP per person, increase business profits, and overall economic wellbeing. Implementing this GBI should drive higher wages for Canadians driven by increased productivity, while increasing the employment prospects of those Canadians currently outside the labour market — as long as governments and businesses invest in education to better match employee skills with employer needs.
A properly designed GBI can help Canada tackle these challenges and position the workforce and society to benefit from the changes that otherwise could put Canadian’s economic wellbeing at risk.
So how could Canada pay for this change to the income tax system to create a form of UBI? Canadian governments could eliminate the following programs completely.
Old Age Security (“OAS”)
This is a pension payment to Canadians aged 65 and old and is paid regardless of work history and paid out of general tax revenue, unlike the Canada Pension Plan. The annual mount someone can get from the program is currently $7,362, decreasing in line with annual income. Once a person’s income exceeds $128,000 they stop receiving any OAS.
Guaranteed Income Supplement (“GIS”)
This is a financial benefit that is paid to low income seniors, with only those with incomes below $18,600 eligible. The maximum annual benefit is currently $10,997.
These two old age benefits have a maximum individual value of $18,359, which is just slightly higher than the GBI floor of $18,200. These benefits act as a form of UBI for seniors, who are currently the only cohort of Canadians benefiting from such a scheme.
According to Statistics Canada OAS and GIS, along with tied benefits for spouses cost the federal government nearly $48bn in 2018, with the average beneficiary receiving $8,300 in annual benefits. Eliminating OAS and GIS and replacing it with a tax system based GBI would insulate low income seniors from the policy change, freeing up $48bn to be used to support a broad based GBI.
Government could also eliminate welfare, which in 2018 cost governments in Canada $15.6bn with the average beneficiary of welfare getting $8,400 in annual payments. Canadians would be better off financially under a GBI than relying on existing welfare payments.
Moving to a tax system based GBI would enable all government spending on welfare to be eliminated.
Goods & Services Tax (“GST”)/Harmonised Sales Tax (“HST”) Rebate
Canada currently operates a rebate scheme for low income Canadians and families. The scheme provides a maximum benefit to low income taxpayers of $443 for an individual or $1,160 for couples. During the Covid lockdown, these benefits have been doubled. The cost of the pre-Covid GST/HST rebates is estimated at $5.5bn. The rationale for the rebates is to compensate low income Canadians who spend a larger share of their income on consumption, which means more of their spending is subject to GTS/HST. These rebates would not longer be required as the GBI would more than offset any loss on GST/HST credits for lower income Canadians.
By eliminating OAS, GIS, welfare expenditures, and GST/HST rebates, which are generally lower per recipient than the tax system based GBI of $18,200, governments could redirect nearly $69.1bn in spending towards a GBI. There would also be government savings from the elimination of OAS, GIS, welfare, and GST/HST rebates. With administration costs estimated at nearly 11% of Employment Insurance payments, governments could possibly generate a further $7.6bn from administration cost savings — bringing total possible program savings to $76.7bn — representing nearly $2,600 per income earning adult in Canada.
There are many other other benefits could accrue to individuals, families, communities, and society from adopting this tax system based GBI. While there have been pilots of forms of universal basic income, they they have yet to be adopted as a national or provincial policy. That said, the research around them does demonstrate some significant societal and financial benefits.
Researchers analysing data from Manitoba’s Basic Annual Income Experiment conducted in the 1970’s found an 8.5% reduction in hospitalisations for those receiving the UBI versus the control group not receiving the UBI. Visits to Doctors, particularly around mental health, also reduced.
This makes intuitive sense, it has long been known that those with lower incomes and living in poverty have worse health outcomes. Providing an income floor of $18,200 and a GBI that tops up low wages that lifts people out of poverty, should be expected to result in better health outcomes.
Canada spend nearly $70bn on hospitals in 2019, assuming that a GBI reduces demand by 8.5%, that is nearly a $6bn savings on hospital spending alone. Healthcare being the largest budget item for Canada’s provincial governments, any reduction in healthcare demand driven by a GBI due to healthier populations will pay large financial and societal dividends.
The same research found that those families receiving Manitoba’s guaranteed income had higher rates of high-school completion than those families in the control group not receiving the financial support. Looking at US data researchers also found that test scores of children improved, school completion rates increased, and more adults undertook further education for those families receiving a guaranteed income.
Improved education outcomes of children and adults are associated with better emotional, health, and financial wellbeing. A GBI that reduces poverty, while encouraging better education outcomes will benefit society through reduced crime, higher employment, and a healthier population. These factors will also help Canada address its labour shortages and productivity gap with the US, while driving up wages.
Politically, economically, and socially the time may have come to create a GBI. With Canadian seniors having a form of guaranteed income through OAS/GIS and the unemployed currently via the CERB, politicians should be looking at a way to ensure that all Canadians have financial security post-Covid, while maintaining an incentive for people to work. Using the tax system to create a refundable tax credit that provides a UBI of $18,200 could be just the solution.
Stay tuned for my next blog that will tackle changes to the income tax system that could further support a tax system based UBI.