Canadians may be forgiven for being somewhat blasé about recent declarations of interest by federal and provincial governments regarding a basic or guaranteed income to address poverty. Canada’s most populous province, Ontario, has even gone so far as to fund a Basic Income Pilot to examine the impact of a specific basic income design on poverty, health and education outcomes.
If the past is any guide, however, moving beyond discourse and experimentation faces formidable political challenges. These include the perception of the prohibitive cost and work disincentives associated with any basic income plan.
We argue that these challenges are overstated. A grand new plan for a basic income is not necessary: changes to the tax system can be adopted to finance what we call a Universal Guaranteed Basic Income (UGBI) while also improving tax equity and fairness.
The crux of our argument revolves around the large pool of tax credits currently used by government to offset taxable income. The federal government spends about $66 billion (2015 figures) to provide an average tax credit benefit of $3,800 to Canadians. However, its structure means that parents and seniors receive significant benefits while non-elderly individuals and couples without children receive very little, particularly in low-income families.
The problem is that tax credits are generally non-refundable, except for the Canada Child Benefit and the Goods and Services Tax (GST) credit. Moreover, they can only be used by taxpayers with sufficient taxable income, an asymmetric treatment that works against low-income families.
A Universal Guaranteed Basic Income can be self-financed by eliminating selected non-refundable tax credits and the federal GST credit, and reallocating these tax credit expenditures from higher to lower income Canadians by an equal-cost refundable tax credit.
The size of the Universal Guaranteed Basic Income budget then depends on which tax credits are eliminated. The important starting point is the Basic Personal Amount, which constitutes 60% of total benefits. While we are less adamant about many other credits, we develop a Universal Guaranteed Basic Income in the June 2017 issue of Canadian Public Policy for which the age credit and the pension, education, fitness, and transit credits are also eliminated, leaving in place medical expense, charitable donation, married and equivalent, disability and caregiver, and employment insurance and Canada Pension Plan (CPP) contribution credits.
Our choices provide a total federal Universal Guaranteed Basic Income budget of $51 billion, which permits a wide variety of guaranteed income options along the lines of a traditional negative income tax. We evaluated these possibilities using the Social Policy Simulation Database and Model (SPSD/M) developed by Statistics Canada.
Our analysis leads us to a Universal Guaranteed Basic Income with the current federal benefit reduction rate of 15% and an income guarantee of $6657 for a single individual and $13,314 for a family of four, topped up according to current practice for those claiming disability, infirm dependant and caregiver credits.
This option maintains consistency with the existing tax system while still delivering significant poverty reduction and income redistribution. It keeps labour supply response and the corresponding efficiency cost of the Universal Guaranteed Basic Income relatively low, provides room for provincial participation at modest combined benefit reduction rates, and provides benefits to a larger segment of Canadian families than options with higher benefit reduction rates. The average net transfer to poor families is $4,342, which improves their incomes by more than one-third, while families with incomes more than twice the poverty standard—Statistics Canada’s Low Income Cutoff—experience modest income losses. Single non-elderly adults, who currently fare poorly, are a primary beneficiary and their overall incidence of poverty falls by 40%.
Canada, like Australia, is a decentralised federation, which allocates significant fiscal and other powers to its provinces. But the Canada Revenue Agency administers and collects taxes for the federal government and all provinces except Quebec and the provincial tax credit systems are generally integrated with the federal system. Making existing tax credits refundable would therefore directly affect the provinces.
Our analysis considers the case in which each province eliminates the same set of existing tax credits as the federal government to produce a combined federal-provincial Universal Guaranteed Basic Income with a budget of $83 million. We adopt the provincial rate used to calculate provincial tax credit benefits as the benefit reduction rate for each provincial plan, and set the corresponding guarantee at a level that exhausts the available budget.
For Ontario, for example, this results in a benefit reduction rate of 5.05% on top of the 15% federal rate for a combined rate of 20.05% and consequent federal-provincial income guarantees of $8,947 for a single individual and $17,894 for a family of four. The combined federal-provincial Universal Guaranteed Basic Income raises disposable incomes in poor families by 54% across Canada and 47% in Ontario, with increases as high as 63% for non-elderly couples without children.
For single and two-parent families, elderly singles, and elderly couples, poverty is virtually eradicated across Canada according to the Statistics Canada standard. Only non-elderly single individuals remain poor in significant numbers, but the poverty rate for this most vulnerable group still falls from 33% to 25%. We also estimate a 10% reduction in work for adults in low-income families and a 2% reduction across the Canadian economy—but these losses and implied efficiency costs are both likely to arise in any guaranteed income plan and are modest compared to other options we considered.
A self-financing Universal Guaranteed Basic Income in the form of a federal-provincial refundable tax credit could address the monetary component of family poverty and eradicate it for all families except single non-elderly persons in Canada. Families with higher incomes would realise modest losses in disposable income to finance the Universal Guaranteed Basic Income, although new funding might be used to offset these losses by further middle-class tax cuts. The refundable tax credit design of the scheme makes the tax-transfer system more progressive, avoids layering a new grand guaranteed or basic income design over the existing inequities in the tax system, and offers a potentially important and cost effective step toward truly universal income security for Canadians. While poverty may well be a multifaceted problem that transcends simple income metrics, the Universal Guaranteed Basic Income we propose could change the recurrent conversation to issues beyond money.
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