Friday, January 14, 2011

Canadian basic income vs guaranteed income

Hugh Segal a Canadian senator has been proposing a guaranteed income for Canadians of $20k.  Guaranteed income means that if you make less than 20k, the government will provide you with the DIFFERENCE so that your total income is 20k only if it would be less than 20k without the supplement.  Universal basic income (UBI) on the other hand, is a cash award (likely much smaller than 20k) for all citizens to do with as they wish.

Guaranteed income is a patently horrible idea.  First, it creates a welfare trap.  It is a massive disincentive to work if every dollar you earn means losing a dollar in benefits.  It takes effort and experience to be qualified to earn more than $24-30k per year, and that effort becomes less attractive if you are taxed at 100% for your first 20k in earnings.  An even more important deathknell to the concept is the potential for tax fraud and riskless speculation.  First riskless speculation, as one example of the canadian tax code, gains and losses from short selling stocks are treated as ordinary income, and so making large bets against Canadian companies would have an outcome of heads I win, tails I break even because guaranteed income gives me back what i lost.  The tax fraud opportunities are similarly investment based, where apparent losses are reinbursed through guaranteed income, and it further promotes untaxed underground economic activity.

Basic income on the other hand is a spectacular idea.  There is no qualification for it, and so no potential for fraud or disincentive to work.  Seniors already receive it through OAS (old age security) program. is an advocacy site that does a good job detailing the case for basic income, and offers a math analysis using 2000 figures.  While I applaud the site's effort to partition basic income (and calculate impact) among adults, seniors and children, I strongly disagree with the proposed basic income levels (10k per adult 15k per couple) as being much too high.

Initial Target Basic income should be a survival level.
$6000 per adult, even in Toronto can afford renting a room ($300-$400/mo) from strangers at market rates, and food.  Granted not much else.  I'm about to show why this number should have strong political right wing support for it.  From page 8 of this UBI advocacy paper, in 2004,

The total Canadian government (both federal and provincial) transfer payments to persons was 130 BILLION dollars, more than double the MacDonald Commission numbers – excluding health care and education. This included all programmes mentioned plus the universal GST (our value added tax) credit. So replacing some of these with a more humane and efficient basic income is hardly a question of wasteful or even new spending.
The largest components of these transfer payments are UI, OAS and welfare. At 25M Canadians over 18, 130B is $5200 per adult.  It is unclear whether the $130B includes the administrative overhead of the agencies  that oversee the transfer programs (and it probably at last excludes union pension obligations), but assuming it does, it means that eliminating all of those transfer programs and replacing them with a $5200 basic income is revenue neutral.

But its much rosier than that.  $5200 in AFTER TAX basic income is revenue neutral.  If we assume that on average, most basic income recipients would have total income above $38k (and use that tax bracket), and with the marginal tax rate for Ontario of 33.30%, then the actual revenue neutral pretax basic income levels we could afford are $7796.10 per person.  So replacing transfer payments with $6000 per adult basic income is actually a significant government expense reduction.  Providing bonuses for seniors and children on top of the $6000 can still be revenue neutral.  Not only is it revenue neutral, but each taxpayer is getting back $6000 (pretax) as well.  Arguing for UBI above $6000 should be deferred until the effects of this initial UBI level can be appreciated.

Basic income has substantial economic and social benefits.  First it is not a poverty program, so it doesn't trap the poor into continuing qualifying.  It replaces many government and charity social services with private and cooperative ones.  It is much easier to help the homeless, depressed and disabled if they have $6000 to contribute to room and board, or for them to band together to share shelter or build communities.

Eliminating desperation through UBI means a whole lot of police and regulation requirements become less necessary.  Desperation is the prime motivator for violent crime.  Desperation and power imbalances are the reason we have oppression laws.  Minimum wage laws become no longer necessary.  So, the young and poor can gain more opportunities for experience and on-the-job training.  Domestic violence accusations without evidence, where intervention is as bad or worse than non-intervention, is based on dated myths that women are economically oppressed by spouses, and so we can shift towards non-judicial-intervention solutions (advise them to separate).  So basic income would help municipal budgets as well, by reducing large public and social services and social costs.

There are more important, but less well understood, economic benefits as well.  Citizens can consume and invest more, because the safety net of basic income means they need to set aside less for emergency or long term unemployment.  The economist Keynes noted that economic activity grows as the multiplier effect (the speed/velocity at which people spend their earned income) grows.  Less risk aversion to spending means increased velocity of money.  Less risk aversion due to the safety net of UBI leads to many more economic benefits:  It is easier to fund higher education.  It is easier to invest or start a small business with lower fixed salary if you have basic income support.  It is easier for employees to consider commission based or profit sharing based compensation instead of fixed salaries.  Both of these (less overhead) means it is easier to make a business case for loans to your business.  The benefits of cooperating for survival create greater sense of community through more relationships, and an interconnected pool of people to cooperate on business ventures and help themselves out of poverty.

There are also some left wing/pro-labour economic arguments for basic income, and higher than survival rate basic income.  First, the only mechanism that exists to counteract wealth inequality towards industrialists is wage inflation.  If some people drop out of the labour pool due to the availability of basic income, then it raises competitive wage and benefits balance for those that remain in the labour pool.  (Which incidentally probably attracts more people back into the labour pool).  In fact, the only criticism of basic income shown on the wikipedia page is that without benefit or wage concessions, labour tends to volunteer fewer hours to their employer.

A $6000 basic income to all Canadian adults is less expensive than the bureaucratic hierarchy that currently oversees poverty and personal transfer payment programmes.  It further brings substantial social and economic benefits that will make Canada strong, successful and happy.


  1. To add some details few people will care about,

    from the tax revenue side some simple enhancements can be made. If UI premiums are eliminated from paychecks, then everyone could receive a 3% raise, and a 5% point increase in all tax brackets, and from an employer (they pay part of your EI premiums) and employee perspective, it would be revenue neutral.

    However, for those that get their income through investments or rents, they would see a 5% tax increase. So overall social/government revenue would increase. This is fair to those people since through basic income, they would now receive a social safety net which they were not entitled to previously (UI or welfare).

  2. $6000 is a ridiculously low number for survival. Sure you can rent a bed-bug infested rat's nest and buy ramen with that, but what if you get sick (which you will, since your apt has poor heating and your diet is horrible)? Can't afford medication. What happens when your winter boots get a hole in them? Can't go anywhere (since you have no money for public transit). $6000 would work if someone's body and all their clothes and cooking implements were made out of titanium.

    Check out

  3. 1. The idea, which you don't propose, that a single individual be given relatively more per person than a person who is part of a couple is a bad idea. That would create some kind of evasion and unnecessary record keeping.

    2. Living in Toronto is different from living in the country. That means it's only sensible that the basic income be different from locale to locale.

  4. Basic income is first and foremost a philosophical right to an equal share of unspent tax revenue. Targeting a minimum amount of unspent tax revenue as a survivalist income provides important social benefits as efficiently as possible.

    I am completely in favour of discussing higher revenue surplus targets so that higher social dividends may be distributed, but the first step is setting a minimum target. If you would agree to a $10k minimum social dividend target (and corresponding tax/spending policy), then you would also agree to a $6k basic income (vs. the current alternative of 0). How much above $6k is just a matter of democratic process.

    To defend the $6k amount though, it permits grass roots cooperation or social services. 20 people sharing a large house for example provides a substantial "family" surplus. You can view the $6k per year as an extra $3/hour in wages. Everyone is completely unrestricted to earn more, and an advantage of minimal basic income is that individuals retain an aspirational motive for contributing to society.