Refundable tax credits and the path to a basic income guarantee

By Robin Boadway

The pursuit of a basic income guarantee (BIG) is gathering momentum, but much of the emphasis has been on setting up pilot projects.

This is fair enough given that implementation of a full-fledged BIG is a major undertaking. But, approaching BIG using pilot projects alone would be unfortunate. Pilots take time, and by focusing on the response of project participants they are unlikely to give a comprehensive account of BIG, which of necessity would involve significant reform of existing tax-transfer systems. A two-track approach could move incrementally in the direction of BIG. It would involve exploiting refundable tax credits in new and innovative directions.

Contributors such as Andrew Jackson have recognized the contribution existing refundable tax credits can make to basic income goals, for example by enhancing the Canada Child Tax Benefit, the Working Income Tax Benefit and the Guaranteed Income Supplement. These are well and good but only apply to a subset of potential BIG recipients. A more ambitious scheme would expand the use of refundable tax credits so all low-income persons are covered, and not just the working poor, the elderly and families with children. An ideal mechanism for doing that would be to make all non-refundable tax credits refundable and geared to income. Non-refundable tax credits include the Basic Personal Amount, Spousal Amount, Age Amount, Employment Amount, Pension Income Amount and Disability Amount, as well as a myriad of narrowly targeted credits. The Child Amount was replaced by the Universal Child Care Benefit in 2015, which though refundable is only weakly tied to income.

Non-refundable tax credits have two features. Since they are non-refundable, only those who earn enough income to be liable for taxes obtain benefit. The least well-off obtain nothing. And, for some non-refundable credits the dollar value of the credit is worth exactly the same to all taxpayers regardless of income.  Others decline in value relatively mildly with income. These features detract from the fairness of an otherwise progressive system. Converting all non-refundable tax credits into refundable ones and phasing them out with income, analogous to the OAS/GIS, WITB and CTB, would be an important step in the direction of a BIG. It would also be consistent with the views of many BIG proponents that basic income should be targeted by income.

The feasibility of such an approach is apparent when one recognizes how much money currently used to fund non-renewable tax credits.  According to the most recent Department of Finance Tax Expenditure Accounts, the annual cost of all non-refundable tax credits was roughly $47bn., including almost $35bn. for the Basic Personal Amount that all taxpayer receive. This is at the federal level alone. Redirecting these funds to fully income-tested refundable tax credits would form a reasonable first step for establishing a comprehensive and unconditional BIG. Recently, Wayne Simpson and Harvey Stevens of The University of Manitoba have done some calculations of the consequences of making non-refundable tax credits refundable. While the consequences depend upon the levels of credits and the tax-back rates, they conclude that such a policy is a potentially important step toward tax fairness and lower income inequality.

Many details would have to be fleshed out in a full-fledged BIG, possibly based on refundable tax credits. What would the relationship be with other transfer programs like OAS/GIS, CCTB and EI? How would the federal government and the provinces coordinate their tax and transfer programs? Ideally, the provinces would also make their tax credits refundable. Eventually, provincial social assistance systems themselves should be replaced by a BIG program delivered through the tax system, although this should not replace the social service components of welfare.

Replacing non-refundable tax credits with income-based refundable ones does not preclude proceeding with pilot projects. By the same token, pilots should not preclude meaningful reform of the tax-transfer system in the direction of BIG.

-- Robin Boadway is a retired economics professor. Boadway studied economics at Oxford University on a Rhodes Scholarship. He has his doctorate in economics from Queen’s University in Kingston.