On May 15, 2018, the Quebec National Assembly unanimously adopted Bill 173, establishing a “basic income” for individuals with “severe employment limitations.” Ontario has experimented with a pilot project which offers a minimum income based on 75 per cent of the Low Income Measure (LIM)1 to some 4,000 participants. In Finland, the Netherlands and California, more modest programs are being tested. In Kenya, India, Namibia and Cherokee, North Carolina, a few extra dollars widely distributed without conditions seem to have a significant impact on living standards, access to education and entrepreneurial initiatives. Guy Standing of the International Labour Organization and billionaires Elon Musk and Mark Zuckerberg are among the advocates of a basic income as a solution to rising inequality and the insecurity resulting from globalization, technological change and deteriorating labour market conditions.2
There is strong evidence that providing some unconditional income to poor people can alleviate stress and provide a springboard for many to become financially independent. However, there is also considerable evidence that much of the money provided is squandered and reinforces antisocial behaviour such as drug addiction and alcoholism. Industrialized countries like Canada already provide considerable social support to the poor – universal health care and education being among the most important. Canada also provides a guaranteed minimum income (GMI) to people aged 65 and over and for families with children. Provincial welfare programs represent a qualified form of GMI, particularly for people with disabilities. However, welfare rates are generally at a very low level and a wide array of bureaucratic rules may reinforce, rather than alleviate, insecurity.
Kinds of GMI
A guaranteed minimum income can take the form of a universal allowance. Alternatively, GMI can take the form of a social assistance program, which targets only low-income people who receive an unconditional base amount. Other issues in designing a GMI include the level of support, the cost and its impact on other taxpayers, the requirement to work or to get training and other work skills, and whether benefits should be paid to individuals or to families.
A universal allowance would be paid to every adult legally resident in a given jurisdiction, independent of income, assets, age or marital status. Other income, earned or not, would be taxed at standard rates, although tax rates might have to be increased to fund the GMI. Additional sums might be given to people with disabilities and separate allowances would be provided for children. In some versions, a supplement would be paid to single people so that two people considered to be a couple would receive less than two independent individuals.3 There would be no obligation to work, but proponents argue that most people want to work and the economic security provided by the basic income would allow them to enter the labour force or get education on their own terms.4
A social assistance program can be considered a form of GMI if the amount of aid is unconditional – in other words, if it can’t be reduced below the minimum level. Social assistance is targeted only to those with low income; as family income increases, the benefit is reduced. Canada already has a GMI for people aged 65 and over (see box). The Canada Child Benefit of $6,496 for children under six and $5,481 for older children, combined with programs in seven provinces and the three territories, constitutes an income-tested GMI for children. Quebec offers the most additional support: a single-parent family receives a maximum benefit of $9,778 for the first child under six. It is also the only province that has a universal floor for higher-income parents. Additional benefits are provided for children with disabilities, reduced for higher-income families at the federal level but universal in Quebec.5
Assistance programs targeted toward people who are not expected to work, such as the elderly, children and people with disabilities, are true GMIs. Most welfare programs, however, require beneficiaries to actively seek a job or participate in programs designed to improve their employability, and impose penalties if beneficiaries do not comply.
In our society, employment is associated not only with income but also with social status and social integration. Employability programs are targeted particularly to young people just coming onto the labour market, to give them the skills and self-confidence necessary to earn a decent living rather than being dependent for the rest of their lives. If a large number of people are dependent on welfare programs, taxpayers may become increasingly angry at having to pay taxes to support others, thus creating a serious social divide.
The new basic income for people with severe employment constraints in Quebec has some characteristics of a universal allowance in that there will be no obligation to work and it will be provided to individuals without reference to a spouse’s income (although a person living with a spouse will receive less than a single person). Earnings will be taxed but will not reduce the benefit, and the limits for financial and other assets are set at a fairly high level.
However, not everyone who has a long-term disability will be eligible for the basic income because only those who have been beneficiaries of the Social Solidarity Program (a component of the existing welfare system) for 66 months will be eligible. People whose incomes are below the amount offered by the basic income will not be eligible if they have been excluded from welfare because of their spouse’s income, the amount of their assets, or receipt of disability benefits from the Quebec/Canada Pension Plan, indemnities for a work-related accident or occupational disease or the automobile insurance program. When children with severe disabilities attain majority (at age 18), they too are not eligible until they have received Social Solidarity benefits for the required period. The new government elected in October may decide to extend coverage.
What’s wrong with a universal allowance?
Proposals for a universal allowance have been around since antiquity, and were revived in the early 1960s. According to the Basic Income Earth Network, no country (or subnational unit) has so far adopted a true universal allowance at a level sufficient to cover basic needs.6 The main argument against such a program is its cost. To finance an allowance for every resident, it would be necessary to greatly increase the tax rate on other forms of income. Logically, a universal allowance would replace most other welfare and income-tested programs. However, proposals from right-wing economists such as Milton Friedman (also put forward by the Macdonald Commission in Canada) were explicitly conceived as a way to abolish unemployment insurance and universal child benefits as well as to permit the reduction of minimum wages.7 The result would be downward pressure on the middle class, whose earnings would continue to stagnate while they would lose many of their existing social benefits and pay higher taxes.
From a left-wing perspective, trade unions have often opposed GMIs or even family allowances and earned income supplements (discussed below) on the grounds that they constitute an indirect subsidy to employers who will no longer have to pay a “living wage.”
The impact of a universal allowance depends on what it would replace.8 A rough simulation of what a $15,000 universal allowance would look like in Quebec (based on the 2015 tax-transfer system) indicates that, if there is no drastic increase in tax rates, people with incomes above $15,000 would be the principal beneficiaries. Because they are mostly not eligible for existing income-tested programs, they would not be affected by the replacement of these programs. The net benefit would be lowest for the poorest people who now receive welfare benefits, the tax credit for the GST, the Quebec Solidarity tax credit and earned income supplements.
Currently, marginal tax rates (including contribution rates for social insurance programs) for incomes above the basic personal income tax exemption are about 36 per cent in Quebec. If this rate is not changed, people with incomes below $42,000 would get a net benefit from a universal allowance of $15,000. That income ceiling represents about 60 per cent of the nonelderly Quebec population. The other 40 per cent of taxpayers would have to pay much higher taxes to finance the program.
Advocates of a universal allowance, among them Richard Pereira and Guy Standing, propose financing the program by eliminating tax shelters such as RRSPs or lower tax rates for capital gains, taxing profits from internet-based multinational corporations such as Netflix and reducing tax evasion in offshore tax havens. Additional funds for financing a GMI could come from abolishing subsidies to large corporations or bailouts for failed banks or introducing the proposed “Tobin tax” on capital transactions or ecological taxes. However, other public services such as health, education, subsidized housing, public transport and environmental cleanup are also competing for government revenue. In Third World countries, basic infrastructure and providing clean water, shelter, health care and education to all communities would do more to improve living standards, create employment and provide a base for future development than direct universal allowances.
A GMI in the form of social assistance
GMIs in the form of more generous social assistance programs are a more realistic possibility than a universal allowance, but these too are fraught with many of the same problems. The Ontario pilot project gave $16,989 to single individuals and $24,027 to couples (plus $6,000 for people with disabilities) with no obligation to work. These sums were clawed back at a rate of 50 per cent of earned income and 100 per cent of unemployment insurance or Canada Pension Plan benefits. Single individuals with incomes up to $34,000 and couples with incomes up to $48,000 were eligible for a full or partial benefit.
The purpose of this project was to test the effect of the basic income on a number of indicators including food security, mental and physical health, housing stability, education and training and labour market participation. Some 4,000 people were offered basic income payments along with a control group of 2,000 people whose outcomes were to be compared with those of the test group. The program was initially scheduled to last three years, but the new Conservative government of Doug Ford has already announced termination on March 31, 2019.9
The Office of the Parliamentary Budget Officer (PBO) estimates that applying the Ontario model across Canada would cost about $44.0 billion after deducting other federal support for the 7.5 million people who would probably benefit from the program (about 32 per cent of the Canadian population aged 18 to 64). The PBO adds that, as other studies and experiments have shown, this kind of GMI might lower labour force participation and hours worked, particularly for women. Lost income tax revenue therefore has to be added to the cost.10
Another major problem with this model is its high marginal effective tax rate (METR) – that is, the combination of income taxes and clawbacks of income-tested programs. Not only was the Ontario basic income clawed back at a rate of 50 per cent, but beneficiaries would also have to pay 7 per cent for social contributions (unemployment insurance and the Canada Pension Plan) as well as taxes on other income above the personal income tax threshold of about $15,000. The METR can readily surpass 80 per cent in many cases. Such a high METR discourages gainful employment and encourages “under-the-table” undeclared income.
The Guaranteed Income Supplement (GIS), the major part of a GMI for low-income seniors, imposes a 50 to 75 per cent clawback on all other income. This creates a poverty trap because recipients face an METR that can eat up as much as 80 per cent of the savings they were counting on in retirement. Few Canadians over 65 are truly poor, but many who have earned middle-level incomes for most of their adult lives find themselves with incomes just above the poverty line in retirement.11
Earned income supplements: An alternative to GMIs
One of the main problems with welfare programs is that income from almost every other source reduces the welfare benefit dollar for dollar (100 per cent clawback), although in Quebec earnings of $200 per month for single individuals and $300 for couples are exempted. This means that, unless a person can go from welfare dependency to financial autonomy in a single leap, it is difficult to leave welfare. An earned income supplement gives back some of the money taken out of welfare payments.
After several unsatisfactory experiments with guaranteed minimum incomes, in 1975 the U.S. government created an earned income supplement, the Earned Income Tax Credit (EITC), which today remains the main cash transfer to low-income households in the United States. Quebec, in 1979, was the first Canadian jurisdiction to create an earned income supplement. It evolved into the Work Premium in 2005.12 Alberta and New Brunswick also offer this kind of tax credit. Ontario and many of the other provinces have essentially integrated an earned income supplement into their welfare programs by structuring them in such a way as to allow beneficiaries to keep some of their earnings.
After experimenting with some small-scale programs, the federal government created the Working Income Tax Benefit (WITB) in 2007. Because the Quebec Work Premium was designed mainly to help families with children (benefits up to $2,432 for a single parent and $3,612 for a couple in 2017), Quebec negotiated an adaptation of the WITB so that it is more generous for single individuals and couples without children than for families. The opposite is true in the other provinces.
Figure 1 illustrates how welfare benefits, the Quebec Work Premium, the WITB and disposable income evolve as earnings increase for a single person. An earned income supplement has three basic phases. In the first phase, earnings above the amounts exempted from welfare clawbacks (a phase-in threshold of $2,400 in Quebec) are supplemented up to a benefit ceiling (which in Quebec corresponds to the point at which welfare benefits reach $0). Both the Work Premium (maximum $558 in 2015) and the WITB (maximum ($1,617) are at their maximum here. The EITC and the WITB, but not the Quebec Work Premium, then have a short second plateau phase of constant benefits. Once earnings exceed the phase-out threshold, the supplement is clawed back at a rate of 10 per cent for the Quebec Work Premium and 20 per cent for the WITB. At the end of this third (phase-out) range, the benefit has fallen to $0.
The dotted diagonal line in figure 1 shows whether a person gets a net benefit from government programs (when disposable income is above earned income) or pays more in taxes and contributions than the value of government transfers (disposable income is below earned income). In this case, the break-even point is a little above $17,000, or less than the value of full-time work at minimum wage. The figure also shows that at this level of income, people get nothing from the Quebec Work Premium and very little from the WITB, calling into question how useful these programs are for encouraging work.
One of the major dilemmas of an earned income supplement is whether to administer it on a monthly or a yearly basis. A monthly benefit allows the recipient to receive the income immediately. In practice, because the total annual benefit is based on yearly income and beneficiaries are likely to have variable monthly earnings, they may be obliged to reimburse much of the benefit at tax time, which was the case with the Parental Work Assistance Plan in effect between 1988 and 2004 in Quebec.13
Like the EITC in the United States, the Work Premium and the WITB are administered yearly as a negative income tax. This means, however, that the supplement is paid six to 18 months after the beneficiary has made the effort to earn income. To address this problem, taxpayers can request an advance payment of up to 50 per cent of the expected benefit during the year. However, most single individuals can’t ask for an advance because the estimated benefit must be at least $500 and very few get that much.
Other work incentives in Quebec
The Government Action Plan to Foster Economic Inclusion and Social Participation, which underlies Bill 173, introduced some new work incentive measures for welfare beneficiaries with no employment constraints as well as modifying some of the existing parameters.
- The maximum Work Premium for single individuals will increase from $730 to $940, which will also increase its phase-out point to about $21,000. For couples without children, the maximum benefit will increase from $1,138 to $1,467 with a phase-out threshold of about $32,000.
- The monthly exemption of $200 ($300 for a couple) will increase by 20 per cent of earnings. For example, a single welfare beneficiary who earns $500 in a month will be allowed to keep $200 plus $60 (= 20% x ).
- The Action Plan proposed a one-time employment retention bonus of $1,000 for people who enter the labour market and stay there for a certain time. The details are to be announced later.
- Under the Aim for Employment Program, an individual plan with a financial bonus is set up for each new welfare recipient with the objective of providing training or work experience or helping with a job search. Bonuses for this program and other similar measures have been increased under the Action Plan.
- A person who has received welfare benefits for at least 24 of the last 30 months, with sufficient earned income to leave welfare, can receive a supplement of up to $200 a month for up to 12 months. This criterion was relaxed from 36 months of the last 42.
- Additional funds will be allocated to help the 16- and 17-year-old children of welfare recipients return to school and complete their secondary diploma as well as to improve success in school for all children from disadvantaged backgrounds.
- Other money will allow young people to develop and carry out social engagement projects as a way of promoting skills and self-confidence.
The central question: Reversing the growing trend toward inequality
GMIs have returned to the forefront of political debate because of growing inequality and the rise of right-wing populist movements around the world with roots in those sections of the population that can no longer find stable, decently paid work. Unprecedented numbers of migrants to Europe and the United States fleeing wars, natural disasters and stagnant economies are shunted into the low end of the labour market where they suffer the worst abuses, but also put pressure on conditions for other workers.
Guy Standing and others advocate a universal and unconditional basic income for all individuals because “unless the progressives of the world offer a politics of paradise, class will be all too prone to listen to the sirens luring society onto the rocks.”14
Fighting poverty requires getting at its root causes: that is, the unprecedented power of big multinational corporations that move their production around the world in such a way as to keep wages down, destroy labour standards and avoid environmental restrictions. If income is not distributed equitably during the production process, redistribution through a GMI cannot eliminate poverty. How to reverse the growing trend toward inequality is the central question of the 21st century. The answer will require political programs coordinated internationally to tax the big companies, control the behaviour of financial institutions and prevent these corporations from eroding the powers of individual governments to establish labour and environmental standards. A new wave of large-scale unionization is also necessary to rebuild working conditions firm by firm.
In the meantime, it would be utopian to expect the federal or provincial governments to provide a guaranteed minimum income sufficient to meet some poverty measure (such as LIM or the Market Basket) for all welfare recipients. Nevertheless, taking inspiration from the Ontario pilot project, it might be feasible to establish a GMI at a level identified with short-term needs on the principle that if you can’t pay your rent, you don’t know where your next meal is coming from and your clothes are in rags, you are not in a position to reenter the labour market. As in Ontario, the clawback rate could be reduced from 100 to 50 per cent and the earned income supplements readjusted appropriately. Employment support programs are also important, especially for young people, but may need to be better linked to real employment opportunities.
1 The LIM is a poverty threshold defined as half the median income in a country. It is the measure used in most international comparisons of poverty rates.
2 Guy Standing, The Precariat: The New Dangerous Class, 2nd edition (London, England: Bloomsbury, 2014); Karl Widerquist, “Current UBI Experiments: An Update for July 2018,” Basic Income Earth Network, retrieved from https://basicincome.org/news/2018/07/current-ubi-experiments-an-update-for-july-2018/
3 The rationale behind this approach is that two people living together need less money than two people living separately, mainly because they share the cost of housing, furniture and household appliances. This question could be dealt with instead through a housing allowance based on the number of people sharing a lodging, independent of family relations.
4 Advocates for welfare recipients in Quebec argue in favour of a GMI based on the Market Basket Measure (MBM) of low income, which is about $18,000 for a single person (Centre d’étude sur la pauvreté et l’exclusion, Faire plus, Faire mieux : un virage nécessaire, January 2016; Collectif pour un Québec sans pauvreté, Revenu de base : un pas vers une meilleure politique de sécurité du revenu, Mémoire sur le projet de loi 173, April 2018).
5 Canada Revenue Agency, Canada Child Benefit and Related Provincial and Territorial Programs, 2018; Retraite Québec website, www.rrq.gouv.qc.ca. As I explained in my previous article (Inroads, Summer/Fall 2018), Quebec programs were designed to “take children off of welfare.” Along with the affordable child-care policy, they seemed to have been successful both in reducing the number of families with children on welfare and in increasing the labour force participation of women with young children.
6 Basic Income Earth Network (BIEN), History of Basic Income, retrieved from http://basicincome.org/basic-income/history/. Since 1982, Alaska has provided a universal oil dividend, sometimes topping $2,000 a year, to every person who has officially been a resident of Alaska for at least six months. In Cherokee, North Carolina, a Native American community, part of the profits from a casino are distributed to all the residents without conditions.
7 Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962); Royal Commission on the Economic Union and Development Prospects for Canada (Macdonald Commission), Report (Ottawa: Privy Council Office, 1985). In Volume 2, chapter 19, the commission proposed a quite modest Universal Income Security Program (UISP) that would have replaced universal child allowances, four assistance programs, most of unemployment insurance and personal tax exemptions.
8 In my simulation, I assume that a universal allowance for adults between the ages of 18 and 64 would replace all welfare programs (including student grants and loans), both the federal and Quebec earned income supplements, the federal GST tax credit, the Quebec Solidarity credit and personal tax exemptions including for spouses and dependent adults since these people would also receive the allowance. It would be possible to maintain housing allowances and topups for people with disabilities without changing the results of the simulation. With these assumptions, every dollar earned would be taxed. Existing programs for the elderly and children, as well as unemployment insurance, parental insurance and workers’ compensation would not be modified. If the GST and Quebec Solidarity credits were maintained, low-income households would get a larger net benefit but marginal effective tax rates on middle-income taxpayers would be higher. The coordination between federal and provincial taxes and transfers is another issue which would require extensive study and negotiations.
9 Ontario, Ministry of Children, Community and Social Services, “Ontario’s Government for the People Announces a Compassionate Wind Down of Basic Income Research Project,” press release, August 31, 2018. One reason given is that it would require an increase of the Harmonized Sales Tax from 13 to 20 per cent if implemented across the province. A new plan is expected in November 2018. The Ford Conservative government has also cancelled the projected increase of the minimum wage from $14 to $15 an hour.
10 Office of the Parliamentary Budget Officer, Costing a National Guaranteed Basic Income Using the Ontario Basic Income Model, April 2018.
11 This METR applies to income such as CPP payments, private pension benefits and withdrawals from a Registered Retirement Savings Plan (RRSP), as well as interest, dividends and rental income. It also applies to earned income and therefore discourages a return to work. According to census data, in 2015, 69 per cent of people over 65 had incomes concentrated in the $10,000 to $40,000 range, compared to 40 per cent of younger taxpayers.
12 For a history of earned income supplements, see my “Politiques pour les familles pauvres : suppléments au revenu gagné et revenus minimums garantis,” in Renée B. Dandurand, Pierre Lefebvre and Jean-Pierre Lamoureux, eds., Quelle politique familiale à l’aube de l’an 2000? (Montreal: l’Harmattan, 1998) pp. 247–88.
13 In the final years of the program, the number of families applying for the program had declined to fewer than 30,000. In its 2004–05 budget, the government estimated that some 335,000 single individuals or couples without children plus 165,000 families with children not then receiving PWA program benefits would be eligible for the new Work Premium (Finances Québec, Discours sur le budget 2004–2005, March 30, 2004, p. 11). Some of the families had been eligible for PWA but had not claimed it and some became eligible because the Work Premium extends much further up the income scale.
14 Standing, The Precariat, p. 314.