What happens when you offer ‘basic income’ for not working? People stop working
Almost 50 years ago, a Canadian Senate report declared that a basic income “is an idea whose time has come.” Ever since, the idea has resurfaced every so often, with support that spans the political spectrum.
A recent Parliamentary Budget Office (PBO) report reinvigorated the debate by estimating the cost of a particular version of a basic income program. Proponents, including National Post columnist Andrew Coyne, go so far as to claim a basic income will end poverty. That is an oversimplification and, in our view, an unconditional basic income is a bad idea whose time should never come.
In theory, a basic income would replace the existing web of income-support programs (welfare, the GST tax credit, Old Age Security, employment insurance, etc.) with a single simple program that provides a cash transfer to Canadians. The PBO’s version is based on a pilot program currently taking place in Ontario and would provide a maximum unconditional cash transfer of $16,989 for single Canadians (couples would receive $24,027).
There are several reasons why this is a bad idea.
A basic income would weaken the incentives to work for lower-income Canadians and people not strongly tied to the labour force (i.e., youth, secondary-earning spouses) in two important ways. First, the transfer does not have a work requirement — even for able-bodied recipients — which raises serious concerns about the potential to encourage dependency on government and discourage people from improving their situation through gainful employment.
Second, because additional income earned triggers a reduction in the transfer amount, a basic income will discourage additional work effort or the willingness to report additional income. In the PBO’s version, a dollar of extra income results in a 50-cent reduction in the transfer. The total effective “tax rate” on employment income — 50 per cent from the basic income claw back plus personal income and payroll tax rates, and potentially other reduction rates in government income-support programs — would be significant.
Indeed, past experiments in Canada and the United States in the 1960s and ’70s with various designs of basic incomes showed that recipients — especially married women — responded by reducing the hours they worked. More broadly, however, proponents of an unconditional basic income ignore the lessons from Canada’s welfare reforms in the mid-1990s and early 2000s, when stronger work requirements and tighter eligibility rules helped reduce dependency.
In 1994, about one in eight Canadians (12.2 per cent) were on social assistance, and welfare benefits reached levels comparable to what a full-time minimum wage job would pay. Partly in response to this growing crisis in dependency, governments across Canada reformed their welfare systems. Reforms varied by province ranging from tighter eligibility rules, work-related requirements (such as job searches), and reduced cash transfers.
These reforms helped dramatically reduce the share of the population on welfare, which fell by almost half from 12.2 per cent in 1994 to 6.3 per cent in 2012. The U.S., with a similar set of reforms, also experienced a marked decline in dependency. If income were to be unconditionally provided, as prescribed by many basic income models, irrespective of working or even searching for work, we shouldn’t be surprised if, once again, fewer Canadians end up in the work force.
Finally, claims about an unconditional basic income “solving” poverty oversimplify what’s often a much more complex problem. First, it’s important to recognize the differences between transitory poverty, which almost all Canadians experience at one time or another (for instance, when they’re in university or college), versus long-lasting or permanent poverty, which is much more worrying.
The root causes of long-lasting poverty go beyond a simple lack of income. Issues such as addiction to drugs or alcohol, mental health challenges, severe physical disabilities, and not completing high school increase the risk of chronic poverty. Crucially, a cash transfer with no restrictions may either exacerbate the problem or not address why someone is stuck in poverty in the first place.
Proponents from across the political spectrum promote the idea of an unconditional basic income. But clearly, the drawbacks are significant and should give us all pause.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is a senior policy analyst at the Fraser Institute. They are co-authors of the study “The Practical Challenges of Creating a Guaranteed Annual Income in Canada”