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Guaranteeing Income

The Eleventh North American Basic Income Guarantee Congress took place at OISE 3-5 May 2012. The purpose of this series of conferences is to move the world toward a system of social justice in which nobody would lack the basics because of injustice built into the system itself.

The Congress, misnamed since it excluded Mexico, dealt with poverty reduction by other means as well as guaranteed annual income (GAI) or basic income (BI), which mean the same thing apart from nuances. I shall therefore use the two abbreviations synonymously from here on. The focus on GAI needs some explanation. If implemented it would provide unconditional income, thus overcoming some of the worst features of welfare, and it would be designed to provide a better income base than welfare, which is recognized to be highly inadequate at current levels. It would provide income for men or women who stay at home to raise children, rather than go out to work for wages. It would be of especial value to wives of farmers on small family farms, and it would greatly benefit post-secondary students; and would provide stability for single people of working age, who now make up the group numerically most affected by poverty in Canadian society. In particular, an adequate basic income is vital to prevent undernourishment among the lowest-income groups. This was demonstrated at the Congress by a session of four papers, which showed inter alia that food banks simply cannot or do not do the job of nourishing the poor. A GAI would greatly reduce a large portion of complex welfare administration and its considerable administrative costs, and it could reduce and eventually eliminate the need for the present style of employment insurance, which is not serving the needs of enough of our unemployed at this time.

I was motivated to find out whether there is real progress in formulating a practicable GAI for Canada. A few members of Science for Peace may recall that I circulated a draft paper on the GAI in January 2010 [1], because there had been a unanimous Parliamentary vote in Ottawa in November 2009 asking the Government to do something about poverty reduction in this country, and this was followed days later by the issue of the Senate report on Poverty [2]. By early January 2010 I had studied enough recent literature on the GAI to know that there was no study in existence at that time revealing the least expensive way of realizing a GAI, and furthermore, that the federal civil service had concluded in 1994 that the two studied forms of GAI were unaffordable [3].

These two forms of GAI occurring in past literature on this subject are:

a) the universal demogrant, defined as unconditional income given to citizens independently of their wealth (though there can be variation according to age group) and

b) negative income tax, which means different levels of support according to other income. Usually the negative income tax is conceived to allocate less income supplement as other income increases, and no support for individuals above a certain cut-off income.

Money given to citizens under the universal demogrant or negative income tax schemes can be tax-free or subject to income tax, a point that wasn’t clear from the review papers and other recent literature I studied in 2009.

My 2010 draft paper chose a negative income tax scheme as shown in Fig. 1 and I calculated its cost from the 2006 income distribution, as supplied by StatsCan. The gross cost for that year would have been $123 bn to the Federal Government, of which at least $73 bn would return directly to the federal treasury through additional income tax collected, reduction of supplements to the aged, elimination (or reduction) of transfers to provinces and additional sales and service tax collected. The provinces would benefit directly through the elimination of welfare, increased sales and service taxes, and increased provincial income tax. Some reduction in health expenditures is also to be expected. But there would nevertheless be additional new taxes required to close the gap between GAI’s gross costs and direct savings to the federal Government. Up until the 2012 Congress, mine may have been the only GAI costing of its type to show the savings to federal government, and I claimed that my choices of parameters in fig.1 were such to provide a basic income of $12,000 to the poorest adults in the least expensive, practicable way. To understand that, however, it is necessary to read literature [3] explaining why the graph of negative income tax (Fig. 1) must have low slopes space does not permit a full explanation here.

Fig. 1 The line with the break point was taken as the form of negative income tax that would yield the least cost to government, without reducing incentives to work. The expression “Wedge Support” appeared in my 2010 draft paper to mean negative income tax that would be taxable. The straight line from S0 to M is typical of what former proposals for negative income tax have looked like.

At the 2012 Congress, there were no parallel studies of negative income tax to compare with mine, but there were several members of a nascent group of about five Canadian researchers planning to do just that for Canada, and I gave them encouragement and offered to cooperate with any data or methodology I could provide. What scheme they will adopt is so far unclear, and that is as it should be, since there are many choices. Note that the choices I made in 2010 assumed no change in the personal income tax scheme, either in levels of taxation or in the thresholds. But researchers in this field are not bound by any such assumptions, as was beautifully demonstrated by an Irish couple at the Congress, who have completed a workable scheme for Ireland, based upon a universal, nontaxable demogrant.

The work of Seán Healy and Brigid Reynolds

For me the highlight of the Congress was the presentation by Seán Healy and Brigid Reynolds of a demogrant model of basic income for Ireland. Demogrants are usually expensive, since all citizens get the same amount of basic income as the poorest would do in the negative income tax schemes. The gross cost of the demogrant is thus very large, and would exceed $240 bn in the context of my study for Canada in 2006. Healy and Reynolds, however, hit upon a neat scheme for getting around that high cost. They proposed that the demogrant should be tax-free but that all income beyond the demogrant income should be taxed at a flat rate of 44 percent. That is to say, they abolished the usual low-income range over which no tax is payable, since the demogrant itself provides a suitable range. Such an approach would have to be modified in the Canadian case, because of provincial taxes, which differ from province to province, but the basic idea might nevertheless be applicable. The flat tax alone would not suffice to pay for the demogrant, but Healy and Reynolds proposed in addition the removal of all tax exemptions and loopholes, because in Ireland, they claimed, the rich in fact pay a substantially smaller percent of income in taxes than those of middle incomes. The abolition of exemptions, rebates and loopholes would bring about some economic justice, with the rich paying a little more percent than those of incomes slightly lower than theirs, because the demogrant is tax-free. These factors enabled Healy and Reynolds to conclude that no new type of tax need be levied to provide the basic income, an astonishing result.

Furthermore, their demogrant fully took into account the support of children, and they defined five age intervals, each having a different basic income. Converted into Canadian dollars these are shown in Table 1:

CategoryDemograntChild$ 2,18418-20 years$ 6,76021-59$ 12,70960-79$ 15,568Over 80$ 16,244

For children, the demogrant would be added to the income of the parent claiming financial responsibility for the child, but would not add to that parent’s income tax. An interesting feature of the Healy-Reynolds scheme is that taxation of moderately high incomes, say above two hundred thousand dollars, would be slightly lower than in Ontario, because of the Ontario surtax.

Other considerations

A group of papers on the final morning concentrated on three sectors of the Canadian social scene: child poverty, single people of working age, and seniors (65 and over). The seniors fare well in the Canadian scheme of things, largely because of the Old Age Security, which all seniors can apply for, and the General Income Supplement, for which there is a family means test. For children, there are many programs attempting to reduce the child poverty as nearly as possible to zero, and these succeed up to a point, but still leave room for improvement. The large range of single people of working age, however, fare poorly in Canada, especially in this age of underemployment and of very uncertain employment, and low wages. For children, for many unemployed and for many working poor, a GAI would represent a great improvement in their social welfare.

Past Research

An experiment with basic income was carried out in Manitoba from 1974-78 in Dauphin and Winnipeg, with the following results. The study didn’t affect people’s work habits or employment, except that women took longer leaves of absence from work after childbirth under the BI scheme than they would have done without it. Another effect, observed in Dauphin, where the supplements were available to all, was in marked increase in completion of the 12 grades of high school, almost to 100 percent. Some former high-school drop-outs came back to finish during the period of the experiment. There was some improvement in health of the inhabitants of Dauphin relative to a control group who did not benefit from the income supplements.

There are currently no further experiments planned in Canada, but one participant at the Congress suggested that a pilot experiment might be worth pursuing, having regard to the different economic conditions now and in the 1970s.

Further comments on negative income tax and the demogrant

When increasing the base amount awarded under negative income tax, the total gross cost of the income supplements rise more steeply than linearly with the base amount, because the range of incomes covered by the grant increases as well. That the curve isn’t quadratic depends on various factors, but it is nevertheless upwardly curved. The demogrant, however, as proposed by Healy and Reynolds incurs a gross cost proportional to the amount allocated, which thus increases linearly with the amount of the grant. This very different feature of the demogrant makes its gross cost easy to calculate and may make it more attractive in the long run. One should note, however, that the Healy-Reynolds scheme depends strongly on the state of the economy, since it is funded to a great extent from income tax, a factor that eventually may need attention.

A reliable funding scheme for basic income needs to come, in part at least, from very steady sources. Over-reliance on income tax could prove fragile and unresistant to recessions. This is a question that can doubtless be addressed, and would be assisted by the backing of a nationally owned bank [4], one that can issue new money in hard times at nominal interest. At the Congress, I suggested that primary resources should be taxed, a proposal originating from Herman Daly in 2011 in order to slow down the throughput of those resources, retard climate change and encourage recycling.

Derek Paul, University of Toronto (Professor Emeritus)

Notes 1. Derek Paul, “Poverty Elimination in Canada,” unpublished draft 18pp. 2010 2. The Senate Standing Committee on Social Affairs, Science and Technology, “In from the Margins: A Call to Action on Poverty, Housing and Homelessness,” December 2009 283 pp. 3. “Improving Security in Canada/Guaranteed Annual Income: A Supplementary Paper” 1994. This document was retrieved from the Human Resources Development Canada Social Security Reform website, which is no longer active. 4. The Bank of Canada is one of the few nationally owned banks that could in practice do this rather painlessly.

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