Kevin Milligan is professor of economics at the UBC Vancouver School of Economics.
The design of income supports in our social safety net always involves tough choices. For those who are struggling, we want to provide enough income to enjoy a decent standard of living. But we also need to make sure employment is financially rewarding for those who are able to work.
Now, a potential solution is gathering attention around the world. Some call it a “guaranteed annual income”; others call it a “basic income” or a “negative income tax.” By whatever name, the idea is the same: Replace existing income supports with a scheme that pays everyone a set amount from the public purse. In some versions, the transfer would be universal – everyone gets the same. In others, it would be phased out as income grows so that high earners would receive less. The premise is that these schemes would unlock the work potential of lower earners once they’re freed from our existing income support system.
Finland recently announced plans to study a basic income scheme. Canadians ranging from Alberta’s NDP Finance Minister Joe Ceci to former Conservative senator Hugh Segal have spoken favourably of such schemes in the past. Proposals are also under discussion in the Netherlands and Switzerland. The common thread running through these stories is that everyone is talking about it, but no one is actually doing much. Why not? The reason is that these universal schemes would be unimaginably expensive.
The Finnish example is typical of the fiscal folly. The Finns propose a monthly transfer of €800 ($1,200) a person, which sounds nice until you do the math and figure out this would require a doubling of existing taxes to fund the program. This transfer would barely replace what low-income Finns already get under their existing social support system, so the bloated scheme 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.
In Canadian terms, an equivalent transfer of $1,200 a month would cost the treasury more than $500-billion a year. Of course, you might then be able to cancel existing social assistance, child benefits, employment insurance and Old Age Security – but that would only add up to about $100-billion in savings, leaving you $400-billion short. As a reference point, current Canadian federal revenues are about $300-billion a year, so we’d need to more than double our current taxes to pay for it. In the Canadian political world, new programs costing $1-billion or $2-billion generate intense political heat, so a Finnish-style basic income proposal costing in the hundreds of billions is simply a non-starter for Canada.
But we can still learn something from the basic income debate while taking a more incremental and realistic approach. Rather than a universal basic income to replace all existing programs, we could provide a modest, targeted transfer that is means-tested through a gradual phase-out as income rises. This way, those who find work don’t immediately lose all their benefits, and so we can balance the desire to help with efficient work incentives. We also can target the benefits where they will do the most good, instead of including high earners in the plan.
In fact, the federal Liberal government’s proposed new child benefit does just that. It will pay about $500 a month for each child and be phased out as income rises. Moreover, economists Wayne Simpson and Harvey Stevens have a similar proposal for the personal exemption and other non-refundable tax credits in our income tax system. They would transform the existing credits into a basic income for everyone, phased out for higher earners. The cost would be an extra $6-billion to $7-billion over the existing system, but we’re not talking Finnish-sized payments here. The transfer would be at most $1,300 a year – a 10th the size of the Finnish proposal.
Both the Liberal child benefit plan and the Simpson and Stevens tax credit plan cut back the costs of a Finnish-style scheme by paying a much more modest benefit and phasing it out for higher-income Canadians. Rather than discussing utopian schemes costing hundreds of billions, it makes a lot more sense for us to take the broad principles of the basic income and apply them incrementally to improve the system we have.Report Typo/Error