Who Would Pay For The Guaranteed Basic Income? You May Be Surprised
Posted August 14, 2020
There has been a steady drumbeat of articles about proposals for a guaranteed basic income.
Until recently, the advocacy was mostly lyrical praise for the social benefits with little detail on exactly what was being proposed, let alone how it would be paid for.
The Basic Income Canada Network (BICN) has addressed that deficiency with an admirable thoroughness. This article examines what is proposed and what the consequences would be.
The proposed guaranteed income for ages 18-64 would be $22,000 for Nancy, who is single, and $31,113 for Tim and Sally, a couple with two young children. This is not subject to income tax.
Benefits are reduced gradually as other income rises using a 40% reduction rate. Thus the benefit disappears entirely at earned income of $55,000 for Nancy or $77,782 for Tim and Sally.
The estimated cost to taxpayers is $134 billion. To pay for it there are savings from existing income support programs, imagined administrative savings, and a host of federal and provincial tax increases combining to produce $136 billion.
Corporate taxes federally would rise from 15% to 20% and small business from 10.5% to 13.5%. Provincial increases are also anticipated but not specified.
High-income earners would see their tax rates increased by about 3%, capital gains taxed at 100%, loss of dividend tax credits and the deductibility of carrying charges. All of that makes a small dent in the $134 billion cost.
Everyone would lose tax credits for spouses and common-law partners, caregiving, disability, first-time home buyers, pension income, tuition, student loan interest, and transit costs, among others. Tax preferences would be lost for pension income splitting, private health and dental benefits, workers compensation benefits, plus scholarship, fellowship, bursary income, and more.
The biggest single item is the elimination for everyone of the Basic Personal Amount which excludes from taxable income the first $13,229 federally and $8,481 to $11,481 in Nova Scotia.
The result is that, in addition to losing the tax credits and preferences, Nancy has her taxes increase from $13,154 to $15,789.
Tim and Sally making $50,000 each will have combined taxes increase from $19,117 to $24,483.
In both cases they might wonder why they bother working at all. On her first $29,500 of income, Nancy pays tax of 24% and gives back her guaranteed income payment at the rate of 40%, plus another 7% for Employment Insurance and Canada Pension for a total of 71%. From $29,500 to $55,000 she loses 84%. Why work for 16 cents on the dollar?
If Tim and Sally are making $50,000 each, their taxes increase from $19,117 to $24,493. Together with EI and CPP, they will pay about $31,500, leaving them $69,500 to pay the bills. That is about $38,400 above what they could have in guaranteed income. Half of that would be needed for childcare costs. Why work?
The experience of some workers being reluctant to return as long as the Canada Emergency Response Benefit (CERB) is available illustrates the point.
It is not only middle-income earners whose behaviour would change. High earners will face a marginal rate of perhaps 58% together with lost tax preferences on their investments.
They may make several perfectly legal choices to avoid the tax, such as:
- Working less. An orthopedic surgeon might decide to take Fridays off rather than work for 42 cent dollars.
- Relocate to a lower tax jurisdiction, which would be in almost any one of the advanced economies.
- Retire early.
- Exploit every remaining tax deduction possibility to the fullest. For example, spread the assets around the family, not just with the spouse.
The BICN model does not consider any of these inevitable changes in behaviour. In practice, they would make the program seriously short of funding. People deciding to work less or not at all hurts the economy and reduces tax intake.
Politically this is a non-starter. Opposition from large corporations, small businesses, universities, unions, and wealthy investors is certain.
More importantly, average families will be unwilling to be bearing the biggest share of the cost.
That said, the BICN identifies a legitimate concern. The panoply of income, housing, and health care programs for people with little or no income is often inadequate, recouped too quickly if earned income increases, and administratively expensive.
That is a target that needs a tightly focused strategy.
Paying everyone to avoid work is a bad idea. Better to raise the pay for those who do. As argued in this space more than once, we should raise the minimum wage to at least $15.00 and maximize the opportunities for people to receive it.
That produces a stronger economy and more tax dollars to provide support for disadvantaged people.
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