The Basics of a Basic Income

Flyer about basic incomeAbout a month ago, Switzerland made international news by holding a referendum on whether or not to give all Swiss citizens a basic income of about $2800 a month. Although the date for the vote still hasn’t been set (as far as I can tell), it certainly raised quite a buzz as analysts tried to frame the pros and cons of a proposal that, quite frankly, is not a new idea at all. Here’s a good summary of some of the arguments and research on the issue.

At its heart, a “basic income” proposal is a system in which each resident of a particular country or region receives a sum of money unconditionally by the government. Unlike many systems of welfare, such money comes with no strings attached, and no means testing to ensure that one needs such assistance. This means that it cuts out much of the bureaucracy involved with welfare benefits: no more case workers ensuring that people are indeed looking for work; no more food stamps that force individuals to spend money on food rather than on other items that may be equally necessary. The system, at least in one sense, is inherently fair, in that everyone in the country receives the same amount: rich or poor, every person gets the basic income from the government.

It is these sorts of qualities about the basic income that have made it appealing to both ends of the political spectrum. Liberals concerned with “social safety nets” and reduction of poverty can endorse its potential to give everyone a living wage. Conservatives concerned with bloated government bureaucracies can get behind the streamlining of the welfare system (since it eliminates much of the bureaucracy), and also its potential to offer similar advantages as the minimum wage, but perhaps without distorting market-based labour incentives to the same degree.1 And that’s why even arch-libertarian Milton Friedman has advocated a “negative income tax” (a very similar type of system) to raise low-income individuals up to a minimum level of income.

Given what I feel are the positive benefits of a basic income, I wanted to do some rough calculations to determine if giving everyone a lump sum of money would be feasible in Canada. Obviously, even if the program is good, it still needs to be possible to implement given our current government budgeting and so forth. So, using this summary of revenues and expenses by the federal government, I did some rough back-of-the-envelope calculations to figure out just how feasible a basic income of $10,000 per year would be.2

Dismantling the “Welfare State”

Greetings from the Welfare StateI started by identifying some of the federal expenses that are currently in place to handle welfare and other wealth transfer programs, which a basic income would presumably make unnecessary. This included: support to elderly ($38 billion), EI benefits ($17.6 billion), GST credits ($3.9 billion), transfers for First Nations ($7.7 billion), and assistance to farmers ($1.7 billion). Note that of course not all of these programs would necessarily need to be axed entirely, but they would certainly be less necessary if a basic income were implemented. In total, these programs add up to $68.9 billion. If all of these programs were cut entirely, the federal government would go from a $26.2 billion deficit to a $42.7 billion surplus. That’s without touching any other government programs at all.

Taking that $42.7 billion and distributing it to every Canadian citizen over 193 would only get us up to $1578 per person, per year. So that’s clearly not enough. To get us up to a full $10,000 per person would take another $228 billion in revenues. Sounds completely ridiculous, doesn’t it?

Cutting out the Middle-Man

Of course, it’s important to realize that for a basic income, most of that money would be taken from the employed and then given right back. The idea of a basic income is to give that income to every citizen. Since about 85% of Canadians make over $10,000 per year anyway,4 they would get money taken away in taxes and then just given right back to them. Those who make the median income would get the same amount of money back, and those who have a higher income would get a little less back than what they gave, but the point is that much of that $228 billion is essentially tax-neutral for most people. Given this, it probably makes more sense to calculate things in terms of a negative income tax model. The basic idea is the same: it’s just that instead of everyone getting a cheque for $10,000 from the government, low-income individuals simply get their income “topped up” by the government through tax rebates. This cuts out a lot of the money being passed around while still accomplishing the same thing.5

About 7.5% of Canadians over 19 fall below the $5000 range in yearly income, and another 7.0% fall between $5000-10,000.6 I wish I had access to more fine-grained data, but if we give everyone in the first category a $10,000 top-up, and everyone in the second category a $5000 top-up, that gives us a relatively conservative estimate (i.e., it likely over-estimates the amount of revenue necessary). With those estimates, it ends up that the government would need $29.8 billion in revenues to provide a negative income tax of $10,000 to everyone. That’s well within the $42.7 billion surplus created by cutting out other welfare programs.

There is also another group of individuals (about 5.4% of Canadians over 19)7, however, who didn’t file taxes at all. This can be due to several reasons, including individuals with no income, or seniors who only receive government benefits and thus have low or no taxable income.8 Not all of these people are going to be in poverty. But let’s be extra conservative and include all of them as well. That gives us a final estimate of $44.3 billion in revenues needed to provide a negative income tax of $10,000. Given the budget surplus from cutting back welfare programs, that would leave the government needing to collect an extra $1.6 billion—which, to put that in perspective, is about 5.6% of the revenue they collect each year from GST, or 1.3% of what they collect in income tax each year. In other words, when it comes down to it, using fairly conservative estimates, the government could essentially eliminate poverty for all Canadians by raising income tax revenues by 1%. That, to me, sounds like a pretty reasonable trade-off.

Conclusion

I’m fully aware that the numbers I’m using can come out somewhat different using different assumptions, different cut-off values, and so on. But I think the estimates I’ve made are fairly reasonable, and using slightly different estimates won’t change the end result much. Ultimately, I think it’s fairly clear that instituting a basic income (or a negative income tax) would be quite feasible in Canada. It could be phased in over a number of years, as the currently existing social programs are scaled back. And although it certainly would lead to some very interesting changes in society and labour, I think the possibility of providing Canadians with a strong sense of financial autonomy is well worth it. People who wanted to upgrade their education could do so without feeling the sting of financial pressure. Parents could afford to stay home with their kids more often. And low-income individuals and families who struggle to stay afloat and out of debt could perhaps begin to gain traction. In short, I think it’s time to take the idea of a basic income seriously.

To learn more about basic income initiatives, here are a few resources:

I work to live not live to work

Notes:

  1. This is somewhat of a debatable point, since giving everyone a basic income means that people will be less reliant on employment. This has led some critics to argue that it offers disincentives to work. I do agree that a basic income may distort market incentives to some degree, but perhaps in the right direction: low-wage, unpleasant jobs like those in fast food may actually be paid more, to compensate for the poor or unpleasant working conditions. It is also interesting to note that in at least one case where a basic income program was tested (Dauphin, Manitoba), the people who were less likely to work were new mothers—who took time off work to spend more time with their children—and working teenagers—who spent more time in school. I find neither of these situations to be a negative thing. []
  2. Note that this is significantly less than the Swiss referendum was proposing. However, it is a number that gets floated around a lot when a basic income is discussed, so it is at least a reasonable starting point. []
  3. What exactly to do with children is an interesting question, but a separate issue. I specifically did not do anything to the children’s benefits programs as a way of ensuring that parents would receive more money when raising kids, but without the silly idea that children should receive $10,000 just like adults. The age 19 cutoff is primarily because that was the nearest age category that Statistics Canada offered for population data. [source] []
  4. Source: Individuals by total income level. []
  5. I should note that economists have put forward several different types of negative income tax models, some of which are designed to taper off top-up amounts so that those making under the guaranteed income are still incentivized to work. While these models have some merit, the details are less consequential for my purpose here of determining, in broad strokes, whether a basic income is feasible. []
  6. Source: Individuals by total income level. []
  7. This was found by subtracting the number of people for which income tax information is available here from the census population data for people over 19. []
  8. Source: User guide for the individual income data. []

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