Advocates of universal basic income ignore enormous price tag

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Appeared in the Ottawa Sun, April 14, 2021
Advocates of universal basic income ignore enormous price tag

Last week, the federal Liberals adopted a policy resolution to introduce a universal basic income in Canada. The stated objective is to alleviate poverty by providing cash transfers to Canadians. However, such a program would come with a massive price tag and unintended consequences.

A universal basic income (UBI) is one of many types of guaranteed annual income programs. Generally, UBI refers to the government distributing a flat amount of money to everyone, regardless of income. This means that every working-age Canadian would likely receive money from the proposed program.

But again, such a program does not come cheap.

A recent study analyzed the cost implications of a UBI based on the $2,000 monthly benefit provided by the Canada Emergency Response Benefit (CERB) program. If all Canadians aged 18 to 64 received annual payments of $24,000 with no strings attached, then the annual price tag would reach $465 billion. For context, that’s almost $100 billion more than all federal spending in 2019/20.

Now, if the government wanted to restrain costs and better target low-income Canadians, it would need to abandon the idea of universality and implement certain provisions, which could include clawback rates, income thresholds or simply reducing the amount.

Consider a guaranteed annual income program based on Canada’s Old Age Security (OAS) program. The government would provide a maximum payment of roughly $7,300 to Canadians aged 18 to 64, but the benefit would be reduced by 15 cents for every dollar of income exceeding $77,580. This program’s estimated annual price tag would be $132 billion.

Although the cost is less than the universal program, there are new problems. Reducing the cash transfer from $24,000 to $7,300 means beneficiaries receive significantly less money and the program may lose its potential effectiveness as an anti-poverty tool. The Parliamentary Budget Officer (PBO) also notes that clawing back benefit as income rises may prompt some individuals to reduce their work hours because the “net amount resulting from each additional hour of work is lower.”

The PBO also used the guaranteed annual income pilot project in Ontario as a model, estimating the cost of a national basic income at $85 billion in 2021, if the cash benefit is $16,989 for individuals and $24,027 for couples. However, the PBO assumes a higher clawback rate of 50 cents for every dollar of employment income, indicating that individuals receive no benefit if their income exceeds $33,978.

The key takeaways? A basic income program will be very expensive regardless of design. It will provide a disincentive to work and may not effectively alleviate poverty.

Finally, to pay for such a program, advocates often suggest raising taxes on upper-income Canadians. The federal government could not, however, pay for such a program even if it confiscated all after-tax income of Canadians earning more than $250,000—this would fund only 25 per cent of the UBI mentioned above and only 87 per cent of the OAS-style guaranteed annual income.

Again, raising taxes on high-income earners would not be enough—not even close—to pay for the program. It would instead require a host of substantial tax increases imposed on Canadians of all income levels, and likely include hikes to the GST.

Simply put, the Liberal policy resolution on UBI ignores basic facts about the costs of such a program.