How to design a basic income for Canada

by Robin Boadway, Katherine Cuff and Kourtney Koebel 

The idea of a basic income – or a guaranteed minimum income for all adult Canadians regardless of employment status -- has evolved from a niche interest among policy geeks to a topic of mainstream political discourse. 

Once advocated as a means of restructuring income supports and relieving income security more generally, a recent wave of public interest is being sparked by people like Elon Musk and Mark Zuckerberg, who see it as the basis of a new social contract in the event that artificial intelligence and automation lead to mass unemployment. 

Many people see the merits of a basic income, yet some, believing a basic income is too expensive, remain skeptical. In the case of a universal, unconditional income that gives every Canadian $20,000, they should be.

But, there are alternative designs to the universal model. In fact, some limited basic income-type programs already exist in Canada: Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) provide a guaranteed income to the elderly; the Canada Child Benefit (CCB) targets families with children. 

In a recent paper, we demonstrate the financial feasibility of extending these designs to the rest of the Canadian population – in particular, low-income working-age people.

Like the CCB, the amount of guaranteed income could depend on an individual or families’ income. No one’s income would fall below a certain level. The size of the basic income, and how it changes with an individuals or families’ income, would be determined by the revenue available to finance it. 

The existing tax system is complex. There are many non-refundable tax credits (NRTCs) that provide low-income tax filers with less financial benefit than that received by high-income filers. Take an NRTC worth $1000. A low-income tax filer who owes $500 in taxes will, with the NRTC, receive $500 worth of the credit. A higher-income tax filer who owes more than $1,000 in taxes will receive the full $1,000 credit. 

If the NRTC were made into a refundable tax credit (RTC), in addition to paying no taxes, the low-income tax filer would receive a “refund” of $500, equalizing the financial benefit for both taxpayers. 

Eliminating NRTCs, RTCs and OAS/GIS would generate enough revenue to finance an income-tested basic income of $20,000 per adult. 

Some experts have estimated it would only cost $30B to eliminate poverty in Canada. So, why not just top everyone up to the poverty line? 

With a top-up scheme, persons earning less than the basic income have no incentive to work because the top-up is reduced by a dollar for every dollar earned. There would be no opportunity to lift oneself above the basic income level. This creates a poverty trap similar to that of our current welfare system. 

In contrast, we have designed our system to facilitate job market participation by allowing recipients to keep 70 cents of the basic income for each additional dollar earned until their income increases to a final phase out point. 

This means low-income workers always have more money when they work more, making it worthwhile to seek paid labour. 

For a nationwide basic income to be successful in Canada, the federal and provincial governments would have to cooperate. 

This is because the federal and provincial governments are responsible for providing income supports to different low-income groups: the federal government provides OAS/GIS and the CCB through the income tax system, while provinces administer welfare and disability payments. 

Coordination can be achieved in two stages simply by harmonizing the BIG between the two governments, much as they do now with income and sales taxes. 

In stage one, the federal government replaces its NRTCs, RTCs and OAS/GIS with a federal basic income. Next, the provinces are invited to join by eliminating their NRTCs, RTCs and welfare and disability transfers. In our scheme, the federal component comprises 70 percent of the total basic income, but provinces could deviate from their amount. 

In our illustrative calculations, we propose a basic income of $20,000 given to every adult Canadian, which is reduced by 30 percent of family net income. Existing tax rates on non-basic income dollars would not be changed. This means, for example, that a worker who earns $25,000 a year would be given a transfer of $12,500.   

We estimate the cost of our basic income to be $162.54 billion. Reforming the tax credits as we suggest would completely cover this cost, while also significantly simplifying the tax system. 

Under our plan, low-income families and the disabled would see a substantial increase in their after-tax income. Poverty rates would decline by an estimated 73 percent. Non-financial social services for those in poverty, the CCB and social insurance programs such as EI and CPP/QPP would be maintained. And, compared to the current system, our plan may actually increase the incentive to work for low-income persons who rely on social assistance. 

All this could be accomplished without raising tax rates or increasing government spending, demonstrating that a basic income is not an unaffordable fantasy.