The rapid fraying of the economy due to COVID-19, with unemployment rates projected to reach 25 percent and higher, has prompted heightened interest in universal basic income (UBI).
Prior to the pandemic, despite a decline in poverty and a slight reduction in measures of inequality, the drum beats for a basic income were growing stronger. Canada’s business sector promoted the idea, Evelyn Forget has published a vigorous defense of the inevitability of the basic income and Hugh Segal, the Conservative Senator and architect of the Ontario Basic Income Pilot (OBIP), has remained a staunch advocate of the policy for many years.
Indeed, UBI has always had validity as an anti-poverty measure. It offers a way to deliver social safety net supports with efficiency and dignity compared to the bureaucratic and often overbearing oversight of social assistance.
Recently, proponents have argued that a UBI makes sense as a proactive policy to support those displaced from the workforce due to technological changes such as automation. Others note the debilitating effects of low and uncertain income on physical and mental health. They stress the importance of social and economic determinants of health, and argue a basic income would deliver greater equality through lower medical expenditures by government and individuals. What’s more, some promise that a basic income will release pent-up cultural, entrepreneurial, and intellectual productivity.
With COVID-19, should short-term employment supports such as the Canada Emergency Response Benefit (CERB) simply be rolled into a UBI? Right now, the CERB pays $500 per week for up to 12 weeks, and to receive it, you need to have earned $5,000 from employment or parental benefits in the previous year (and not have received Employment Insurance or quit a job voluntarily). Can the CERB serve as a model for a basic income? Is now the time to implement a basic income for Canada? If so, what needs to be done to create an effective, efficient and equitable basic income?
One challenge is that proponents minimize the potential hurdles in implementing a basic income. Equally, opponents tend to exaggerate the difficulties. Both sides talk past each other.
I argue it is possible to create a basic income program to function as a social safety net, but we need to go into such a fundamental policy shift with eyes wide open. If Canadians see the program as being either too generous or too restrictive, or if administrative snags send support to those seen as undeserving while missing those most in need, the program will quickly lose favour.
What is a basic income and how does it operate?
Too often, both proponents and opponents of UBI fail to appreciate that a basic income is fundamentally a tax program; higher income Canadians pay more taxes to create an insurance scheme most will never access, to support those who may never actually contribute much to support it. As a tax-based policy, UBI will inevitably involve a much larger role for the Canada Revenue Agency (CRA) to target the payments accurately and to audit payments to ensure fairness.
Second, a basic income is an unconditional grant using some measure of economic well-being, usually income. Advocates typically focus solely on income as the basis for eligibility and ignore wealth. Failure to create a more expansive measure of economic well-being to include wealth in the calculation of both eligibility and payments risks sending payments to low-income, but wealthy people.
Finally, moral hazard and envy can create a politically toxic environment for a basic income. Finding that “sweet spot” for payments is critical to eliminate work disincentives and to avoid resentment among those whose economic well-being lies just beyond the eligibility threshold.
A demogrant and a negative income tax (NIT) are the common forms for a basic income. A demogrant makes regular payments conditional on some form of demographic eligibility (age, residency, or citizenship), but not income, wealth, or work participation. A typical format involves payments to all residents (citizens or permanent residents) over the age of 18, with additional income above some threshold taxed back. While some advocate for a tax-free payment for all, most demogrant proposals avoid paying the basic income to higher earning individuals. Taxing excess income as reported annual return is a mechanism to ensure targeting to those who need help. If the demogrant is $16,000 per year, then any dollar earned above that is subject to a tax back, typically at some rate less than 100 percent.
The demogrant has never gained policy traction in North America, possibly because many recipients might spend without setting aside funds to cover taxes. This is a danger with the CERB as the government has taken pains to caution recipients. Those who spend the entire amount could face nasty tax surprises with consequent political fallout. This is a paternalistic view no doubt. It also seems strange to offer income support to well-off households only to claw it back each year.
The negative income tax is the most common form of basic income and experiments such as the Manitoba Basic Annual Income Maintenance Experiment (Mincome) and the Ontario Basic Income Pilot (OBIP) announced by former Ontario Premier Kathleen Wynne in 2017, all used this framework. By definition, support only flows to those filing income tax. The logic behind the negative income is that if your earnings fall below some threshold—in OBIP it was $33,000—you received a top-up. Figure 1 shows the OBIP plan for a single person. At zero earnings a single person is guaranteed $16,989 and couples would receive $24,027. The OBIP payments shrink as earnings rise, disappearing entirely at earnings of $33,000. Individuals and couples with children under 18 could expect to receive the Canada Child Benefit. OBIP payments are tax free, but not any earnings recipients may receive.
Clearly it “pays” for a couple, each without income, to remain single and co-habit with that household receiving almost $34,000 if their common-law status remains unchallenged.
Using the same fictive “couple,” if one is designated as a custodial parent with two children, that household could receive over $40,000 in benefits from the government without working. Assuming no disabilities, that is a number many Canadians may have trouble accepting.
It seems intuitive that only those who submit an income tax return would be eligible to receive a basic income–that was the case for OBIP–yet many people do not file. Some estimates put non-filing among First Nations persons as high as 40 percent. They are not evading tax, since income earned on reserve from First Nations owned businesses is tax free. Also, while social assistance recipients must report earnings to their social workers, many may not bother since any taxable amount may fall below the basic exemption, which is $13,229 for 2020. So, a critical task for any basic income in Canada is to persuade many current non-filers to submit an annual return. This may be challenging in the case of some First Nations which see the federal government as not having the authority to tax their citizens.
These non-filing families miss out on the Canada Child Benefit, which for a family with three children could amount to about $18,000 annually. If Canada adopted the same policy as the United Kingdom, where government prepares the return and the taxpayer submits any deductions, reports earnings not deducted by employers, and verifies the return, the burden of filing would be very much reduced. This might induce many non-filers to submit a tax return. Of course, gaining eligibility for the basic income may also be an inducement to file.
Another administrative requirement for basic income recipients is having a bank account to support direct deposit. OBIP required this. One of the reasons the CERB rolled out quickly was that payment could flow immediately to the recipients through direct deposit. This also allows the CRA to review non-reported sources of income and access bank accounts during its audit process.
Defining economic well-being requires a broad measure
Eligibility for the basic income typically uses earnings as the benchmark for setting eligibility and payments. Yet it seems obvious that measures of wealth should be included in both eligibility determination and figuring payments. If someone has several hundred thousand dollars of equity in their home and other investments, many Canadians would question whether they should receive a basic income. In normal times, homeowners do lose their jobs. The question is whether they should be required to access the equity in their homes before receiving a basic income.
This was the practice for social assistance programs prior to welfare reform in the 1980s. Applicants were required to dispose of assets before they would be considered for support. Current regulations recognize the hardships imposed on a family if required to sell their home. Forcing the sale of a car is also counterproductive to regaining employment. Many social assistance programs now allow recipients to remain in an owned residence and retain their vehicle. Of course, social assistance administrators are unlikely to accept an application from someone who has several hundred thousand dollars of equity in a home. Social assistance regulations leave room for discretion in deciding which assets may be retained, while qualifying for support.
Most negative income tax experiments, including OBIP were mute on wealth and how it should determine eligibility and payments. Mincome was the exception. Recipients had to disclose the ownership of real (house and car typically) and financial (savings and investments) assets. The screening interview used to create the treatment and control groups in that experiment eliminated those with incomes and wealth above a certain threshold, and anyone enrolled as recipients had their monthly payments adjusted based on net worth. Since Mincome closely monitored the participants in terms of changes in work, income and assets, it could adjust the payments through each survey cycle (approximately every three months). As an example, a Mincome participant could expect to see monthly payments fall, if they inherited anything of substantial monetary value.
Where should the wealth, or more specifically the net worth threshold be set, above which one would not receive a basic income until some assets had been liquidated? $100,000 seems low since many workers, especially those with a car and some years into home ownership would have this. Forcing these potential recipients to finance home equity loans to receive the basic income seems punitive.
At the other end, one million dollars in net worth is probably too high to qualify for a basic income, since many Canadians of modest income, have been able to ride the housing price escalator up, especially in Toronto and Vancouver. It seems obvious to require these households to liquidate some assets before receiving a basic income. This does not mean selling the house since financial institutions are willing to lend on the basis of home equity. How far down should assets be liquidated? As a starting position, why not use $100,000 in net worth as the threshold above which one could not receive the basic income?
This exercise demonstrates a practical problem: the CRA does not track wealth very well. While income tax returns currently ask whether one has sold a home designated as the principal residence, tracking net worth would be a formidably complex. Just assembling all the information on investments, properties, art, vehicles and other assets for each tax filer represents a gargantuan task. But focusing just on certain assets such as home ownership, vehicles and financial assets, the problem becomes easier. With the appropriate data sharing agreements, the federal government can access property tax and motor vehicle records. It already has access to the financial assets held in banks, credit unions and trusts. In this light, the problem of recording significant portions of wealth becomes manageable. But note we are expanding the scope of CRA again.
Moral hazard and the politics of envy
Moral hazard, that evocative term popularized by Kenneth Arrow, the Nobel laureate in economics, usually refers to how participants behave in health and other insurance markets. For example, home insurance tends to make people less vigilant about locking doors, since losses are covered. Insurance companies try to cover this by using deductibles, fine print limiting liability for losses, and raising rates for those victimized multiple times. Social policy such as the basic income is really a society-wide insurance scheme, and so the idea of moral hazard applies.
Policy analysts have long recognized the potential for social safety nets, including the bailout of the US banks in 2008, to create moral hazard. Quite simply, conventional economic theory predicts that when offered cash support, recipients will tend to reduce their work effort. I noted this when evaluating the National Child Benefit (NCB) some 25 years ago. After convoluted statistical analysis of some 3,000 records, it appeared as though the NCB encouraged some recipients to reduce their hours of work, so much so that the net effect of these payments blunted the impact, depth and incidence of poverty. This finding caused consternation in government which assumed that the $5 billion in expenditures on the NCB should have moved the poverty needle.
On deeper examination, it seemed that those women who had reduced their work effort—and it was women since 95 percent of the designated recipients of the NCB were women—were behaving completely rationally. The work reduction was concentrated among women who had children with special needs, and who also had an employed partner. They had made the completely understandable choice to use the NCB payments to reduce their time at work and focus on parenting. Eventually, government came to accept this as a positive outcome of the NCB.
Such work reduction in response to a safety net program such as the basic income is an example of moral hazard. The point of this anecdote is that social safety nets do alter work choices in understandable and rational ways. The income maintenance experiments of the 1970s, including Mincome, focused on measuring the extent of labour market withdrawal in response to the basic income. All found a relatively small work effort reduction over the life of the experiment.
It may be easy to dismiss concerns about work reduction as a conservative obsession with the value of work and the nobility of toiling. However, no research has measured the long-term behaviour of workers in receipt of a basic income. None of the basic income experiments of the 1970s persisted long enough to test whether work reduction occurred. The long-term change in work effort may be larger, but it would likely remain relatively small especially if the basic income is modest. Quite simply, on a basic income such as the one that would have been provided in Ontario under the OBIP, it would be hard to manage all the essentials of life let alone any small luxuries. As a current example, the COVID-19 lockdown has mandated home schooling, where a household needs several computers, a printer, and a decent internet connection. These are not extras but necessities, especially if we expect children in low-income families to have a fighting chance in the modern labour market.
Moral hazard connects to the politics of envy. Basic income proponents and opponents have focused exclusively on recipients, often posing a simplistic dichotomy between the low-income recipients and the supposedly much higher income tax payers, or the one percent who will fund the UBI. In fact, the continued work response and political support of workers in the immediate income tranche above the breakeven point of a basic income is crucial for the political acceptance of a UBI. For the OBIP, the breakeven was $33,000 in earnings for a single person. Someone earning this amount will invariably compare their situation with someone earning $12,000 in part-time work who would receive about $12,000 as a UBI top-up (see Figure 1) bringing their total income to $24,000.
Of course, $24,000 is much less than $33,000, but the question none of the experiments, including Mincome and OBIP, could answer is what effect does the basic income have on those with incomes just at or above the threshold? This is important for two reasons:
- First, this group needs to keeping working and not slack off just because the social safety is wider (moral hazard again). If they relax their work participation, then the costs of the basic income will increase, and the tax burden will fall on a narrower group.
- Second, these workers may have mixed reactions to a basic income. On the one hand they could visualize themselves using the basic income more easily that higher income workers, and on the other hand, a portion of their taxes will fund basic income recipients. It is not a given that this group will endorse the basic income.
As a note, corporations, the ultra wealthy, and the one percent are probably indifferent to the introduction of a basic income. It is a fantasy to think that corporate profits can finance the basic income without creating major investment disincentives and a flight of capital. The uber rich can shift wealth easily and if we wait for international agreements among 300 countries to limit offshore wealth movement and taxation of profits, we will never implement a basic income. And finally, the one percent, comprising well paid professionals, are probably prepared to shoulder part of the burden for a basic income, but it cannot be financed from this group alone. The tax reach will need to be broader than that.
Advocates for a basic income tend to brush off administrative challenges and possible behavioral responses associated with the introduction of a UBI. It will certainly increase the involvement of CRA both to deliver the program efficiently and to target it to only those eligible to receive payments. Some elements of net worth need to be included in well-being to adjust payments. And most tricky of all, issues of moral hazard and envy that could erode political support need to be addressed head-on.
COVID-19 has demonstrated the need for a resilient social safety net, one element of which is the basic annual income in addition to an effective public health response. It is likely that a basic income cannot be implemented until after the pandemic has been tamed. What’s more, the CERB is too narrowly based–it requires a prior work record–and a guarantee of $24,000 annually is likely too high. The support offered by OBIP for singles and couples, plus the Canada Child Benefit is a good starting point.
The next order of business for advocates is to stop promising extravagant outcomes from the basic income such as ushering in a new area of art and culture, entrepreneurship, and advances in education. Instead, the focus should be pragmatic implementation, selling the idea for working Canadians as an essential element of a social safety net and detailing the implementation. The initial support levels will likely be lower than many would wish and will not cover the essentials needed for survival in a modern society. Yet, just as regular increases bolster supports like the child benefit, so too will politicians be inclined to increase the basic income regularly.
Gregory Mason (www.gregorymason.ca) has been on the faculty in the Department of Economics at the University of Manitoba since 1974. Between 1981 and 1985, he directed the Institute for Social and Economics which developed the Mincome data for research use. Between 1988 and 2015 he also served as Managing Partner at PRA Inc. where he conducted the evaluation of many major government programs. Since retiring from PRA, he continues to teach and focuses his research on health information technology, Indigenous economics, and anti-poverty policies. He also advised the Ontario government and implementation of the Ontario Basic Income Experiment and conducted its baseline evaluation.