Ontario’s basic income unlikely to help people get ahead
This spring, the Ontario government will launch a three-year “basic income” pilot program and a key question to consider is how the program will impact the willingness of recipients to work. While it is possible to create a basic income that improves work incentives, the version being proposed and tried in Ontario will discourage work and encourage dependency.
The program will provide a single person up to $16,989 per year in tax-free government transfers plus a maximum $6,000 more for persons with disabilities (couples will get $24,027). The transfer is unconditional, meaning recipients are not required to work or look for work.
The value of the transfer is reduced by 50 cents for every extra dollar a recipient earns (the transfer is reduced by a full dollar if the additional income comes from the CPP or EI). That means a recipient’s overall income will increase by only 50 cents when earning an additional dollar of employment income. The reduction in the transfer operates like a “tax” on additional income, diminishing the benefit of working more.
Critically, Ontario government’s basic income pilot will largely be an add-on rather than a replacement to existing income support programs. The only programs being replaced are Ontario Works (the province’s main social assistance program) and the Ontario Disability Support Programs. This means the reduction in the basic income transfer as recipients earn additional income will be on-top of similar reductions in existing federal, provincial, and local government transfer programs.
In some cases, the combination of the basic income program, existing programs, and personal income tax rates will result in astonishingly high tax rates on additional income.
Consider an Ontario family with two children and $40,000 of income. Under the current the system, such a family loses almost 60 cents for every dollar earned to the combination of personal taxes and reduction in various government transfers. To put it in perspective, this rate of tax is actually higher than the top marginal income tax rate upper-income earners face in Ontario. And this is without considering the impact of the basic income.
The basic income program will result in an additional 50 cents of lost transfer income for every dollar earned. This could lead to a total reduction of more than a dollar for each additional dollar earned. A basic income—when combined with personal taxes and other transfer programs—could have the perverse effect of actually reducing the total income of some recipients if they try to improve their situation by earning more employment income.
While Ontario’s basic income pilot program may shed new light on the issue, it won’t “help more people in our province get ahead and stay ahead,” as the premier suggests.
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