What Would a Universal Basic Income Look Like in Canada?
How Canada would need to change its federal income tax system to fund a UBI of $1375 per month.
We often evaluate the development of countries using economic indicators such as gross domestic product (GDP) per capita or average household income, whereby rich countries are considered to be more developed than poor countries.
While this may be a generally true statement when describing the overall development of a nation, these indicators do not tell us the whole story of a country’s socioeconomic state.
Certain metrics, such as the percentage of people living in poverty, are typically lost in these indicators. Two wealthy nations might have a similar GDP per capita, but the one with greater income inequality, would likely have a higher poverty rate and percentage of millionaires than the other.
One proposed solution to eliminate poverty and reduce income inequality is a universal basic income (UBI). A UBI would be a fixed income payed by a government to all its citizens regardless of their current economic status.
The rationale being that if every citizen had more income than the poverty threshold, then there would no longer be any poverty in that country.
However, the concept of a UBI is not without controversy, with questions being raised about how it would be funded, and whether it would disincentivize work. To get a clearer image of what a UBI might look like in Canada, we will first start by answering the following questions:
- How much UBI would need to be provided to ensure no Canadian would live in poverty?
- How would the Canadian government fund a UBI program?
- How many Canadians would benefit from a UBI?
Implementing the universal basic income
The implementation of a UBI would allow Canada to simplify its tax and welfare system simultaneously. The current welfare distribution system has several rules and requirements determining eligibility, and a bureaucracy that administers it. Similarly, our tax code has various rules and exemptions to bring tax cuts to those who need it most.
However, both these systems result in a large bureaucracy which in turn costs the very taxpayers these systems are trying to help. A UBI could be implemented while simultaneously simplifying our tax code into the following single-rate equation:
Tax = rate × income − UBI
One key difference from our current tax system is that this tax would be allowed to go negative. A negative tax is therefore money that the government must pay the taxpayer.
Nevertheless, even though the UBI would be written in the tax code, the same amount would be distributed to each citizen, therefore it could be distributed more frequently than once a year. The UBI could be split into monthly or biweekly payments which would help Canadians by eliminating the risk of running through their UBI before the end of the year.
A side note: Quebec has a slightly different federal tax code from the rest of Canada. The refundable Quebec abatement is a 16.5% tax return to residents of Quebec on their basic federal tax. In short, residents of Quebec pay less federal income taxes and more provincial income taxes so that their provincial government has more autonomy over government spending in the province. Therefore, we will make two assumptions moving forward:
- Residents of Quebec have the same income distribution as the rest of Canada.
- Since the population of Quebec made up 23.2% of the population of Canada in 2016, then 23.2% of tax returns filed are from Quebec.
Setting the universal basic income amount
Setting the UBI amount is a balancing act. We don’t want to set it too high such that the UBI would disincentivize work. However, we also don’t want to set it so low that it is unable to accomplish its task of eliminating poverty.
The UBI should be just enough such that any Canadian can live a decent standard of living without any other source of income. Therefore, to calculate the UBI amount, we will need to estimate what the lowest income that allows for a decent standard of living in Canada is.
Housing is typically the largest reoccurring expense that Canadians incur. February 2020 data from rentals.ca (Table 1) shows that the national average rent for a 2-bedroom unit in Canada is $1749 per month. It’s worth noting that this value is calculated from 30 Canadian cities and is only based on rentals posted on their website, however it may still serve as a good estimate for average rent in Canada.
The UBI will be set according to the following principle: Any Canadian can avoid poverty by living in a 2-bedroom apartment with 3 other people. Taking $1749 per month over 12 months and splitting it evenly with 4 people would result in an average annual cost of housing per person of $5247 per year.
You may be thinking at this point that housing prices vary greatly between cities in Canada. We will come back to this point later. We will now estimate the total income someone would need to sustainably pay that rent. A common rule-of-thumb is that you should pay no more than 30% of your gross (i.e. before-tax) income on housing.
Therefore, to meet the housing requirement we described, someone would need an annual gross income of $17 490 (i.e. 30% of $17 490 is $5247). However, the UBI would essentially be a tax-free income (i.e. from the above tax equation, we can see that Canadians would not get taxed on their UBI).
Therefore, we must calculate the current after-tax income of someone making a gross income of $17 490. This income would result in a federal tax of approximately $640 and we will assume the provincial tax would be about half that at $320.
This results in an after-tax income of $16 530, which we will round to the nearest hundred. Therefore, every Canadian would receive a universal basic income of $16 500 per year or $1375 per month.
Calculating the tax rate
We will want our new tax system to be revenue-neutral. This would mean that the federal government would still be able to raise the same amount of revenue from our new income tax plan as they do from their current income tax plan.
We will use data from Statistics Canada and Global News while adjusting for inflation to 2019 CAD using the Bank of Canada Inflation Calculator to get an income distribution representative of Canadians.
To complete the data set, we will add a 0th percentile at $0 (i.e. someone earning $0 is making more money than 0% of Canadians), and a 100th percentile at $3 042 662 based on linear extrapolation.
This value is most likely an underestimate of the true 100th percentile (i.e. the highest earning Canadian), however it is better to use a lower value since it means we are not considering the additional tax contributions that the ultra-rich would make towards funding a UBI. The completed income distribution data set is shown in Table 2.
We will consider two possible scenarios:
Scenario A: The only change we make is to the tax rate. All unemployment benefits, employment insurance policies, tax deductibles, etc are unchanged.
Scenario B: In addition to changing the tax rate, we also eliminate most unemployment benefits, employment insurance policies, tax deductibles, etc.
A repository of the Python code I wrote to produce the following results and graphs can be found on my GitHub.
Scenario A: Only change the tax rate
To determine what tax rate we should establish for our new income tax plan, we will first need to estimate the current income tax revenue the federal government would receive before any tax deductibles and other tax benefits are applied.
This is our most expensive scenario in the sense that in this scenario people would continue receiving their current tax and unemployment benefits on top of their UBI. Therefore, the tax rate that we calculate here would likely be an upper limit or worst-case scenario for a taxpayer in comparison to the rate we would need to use in practice to remain revenue-neutral.
There were approximately 30 million tax returns filed in Canada in 2019. To estimate the total current federal tax revenue (before benefits), we can create a list of 30 million hypothetical taxpayers with their income distribution matching the distribution found in Table 2.
From this list of incomes, we can then calculate the amount of federal taxes each person would currently pay, before the application of unemployment benefits, employment insurance policies, tax deductibles, etc. We can then determine the total federal income tax revenue the government would receive before considering these benefits.
From there we can calculate what the tax rate would need to be so that the new tax plan generates the same amount of revenue as the current tax plan does before benefits. This calculation resulted in a tax rate of 46.9%. In this scenario, 59.1% of Canadians would see a tax break, i.e. Canadians making less than $45 500 per year, while the remaining would see a tax hike. The results are summarized in Figure 1.
Scenario B: Eliminate most tax and unemployment benefits
In 2018, the Canadian government received $163.9 billion in income tax revenue and $22.3 billion of revenue from employment insurance premiums. In return, they distributed back $18.9 billion of employment insurance to Canadians.
The amount of revenue the federal government would need to raise from our new tax plan if we eliminated tax deductibles and employment insurance is $167.3 billion (i.e. $(163.9 + 22.3 - 18.9) billion). Adjusting for inflation to 2019 CAD results in a value of $169.71 billion.
This value is obtained after Canadians have already claimed their tax deductibles on their tax returns and paid or received employment insurance premiums or benefits. In this case, whereby we eliminate all forms of tax benefits that Canadians currently receive, this can be considered our lower estimate on a tax rate, since the loss of those benefits helps to pay for the UBI.
Using a similar methodology as before, we can see that eliminating employment insurance and other tax deductibles would result in a tax rate of 42.6%. In this scenario, 66.6% of Canadians would see a tax break, i.e. Canadians making less than $53 600 per year, while the remaining would see a tax increase. The results are summarized in Figure 2.
Potential socioeconomic effects of implementing the universal basic income plan
We have estimated that we would need to implement a federal income tax rate of 42.6 — 46.9% to support a UBI of $16 500 per year. In practice, the federal government would need to implement such a plan in real life and see how their budget is affected as a result.
The tax rate and UBI would then be adjusted annually until an equilibrium is reached whereby public benefit is maximized and tax burden minimized. However, the UBI amount and tax rate we calculated here could serve as a starting point towards implementing such a plan.
Now let’s go back to the original question posed in the title of this article: What would a universal basic income look like in Canada? We have an idea of what the numbers might look like and the direct impact this would have on the after-tax income of Canadians, but what indirect effects might we see?
How would the unemployment rate be affected?
A common argument from critics of a UBI is that it would disincentivize work. However, a possible outcome of implementing this UBI plan could be a decrease in full-time work, with an increase in part-time work whereby the overall number of Canadians working increases. Consider a business that requires 400 work hours per week from its staff.
They could currently hire 10 full-time workers at 40 hours a week. They could also hire 8 full-time workers and 4 part-time workers at 20 hours a week for a total of 12 employees. This could allow for someone to supplement their UBI with stable part-time work, while also engaging in work which may have a less stable stream of income, such as contract work or artistic projects.
Whereby previously Canadians would need to rely on a full-time income to maintain a decent standard of living, more part-time jobs would allow more Canadians to be employed and supplement their UBI.
Would provinces follow suit?
So far, we have only discussed making changes to federal income tax policies. Provinces may see the benefits of such a program and could adjust their tax rates accordingly. Provinces would likely have to administer much less in the form of welfare, therefore reducing provincial government spending.
In turn, they may feel it is appropriate to reduce taxes as a result, this may offset some of the additional tax burden placed on higher-income earners. The provinces might also take this opportunity to lower provincial debt or invest in public infrastructure which could in itself create more jobs.
Conversely, provinces may want to implement their own system and have a top-up to the federal government’s UBI to account for differences in the cost of living in different provinces.
From Table 1, we can see that Ontario and British Columbia have considerably higher rent in their major cities compared to the rest of Canada, therefore these provinces may consider it beneficial to implement a provincial UBI on top of the federal government’s so that their residents can maintain a decent standard of living.
Could a UBI help normalize housing prices across Canada?
If we look back at how we defined our UBI, we considered that 4 people living off their UBI could share a 2-bedroom apartment that costs $1749 per month. However, if you live in Vancouver or Toronto, then you’re looking at paying $2800 or $2926 per month on average, respectively, for a 2-bedroom apartment (Table 1).
If your UBI is your only source of income, then you wouldn’t be tied to a job. If you don’t have any other reason to stay in a particular city, you might begin asking yourself if it may be worth moving to a more affordable city like Calgary or Montreal, where you could rent a 2-bedroom apartment for $1448 or $1832 per month on average, respectively (Table 1).
If no action is taken by municipal or provincial governments, we could see some internal movement within the country among unemployed and low-income Canadians. A UBI would give Canadians more financial freedom and they would be able to relocate within Canada more easily without the financial stress that can usually be associated with such a move.
This could cause a net migration from expensive cities to more affordable cities. This could also have a normalizing effect on housing prices and rent, i.e. less demand for housing in expensive cities would cause a decrease in rent, while higher demand in more affordable cities could lead to an increase in rent.
This internal migration could reduce the disparity of housing costs between cities until a new equilibrium is reached. In turn, as mentioned in the previous section, provinces may want to implement their own UBI, on top of the federal government’s plan, to account for differences in the cost of living between provinces and to reduce net migration from their province to the rest of Canada.
Similarly, businesses in expensive cities may need to increase wages if there is a sudden drop in available workers. All these changes could potentially help normalize the gap between average wages and cost of living throughout Canada.
Would we still need a Registered Retirement Savings Plan (RRSP)?
The concept behind an RRSP is that you can make tax-deductible contributions while you’re earning a high income so that you can avoid paying, at least partially, taxes that would be incurred at a higher tax bracket.
Then when you retire, you would presumably have a lower income than at the peak of your career and you would then withdraw money from your RRSP which would now be taxed in a lower tax bracket, in addition to making tax-free capital gains on any investments inside the account.
However, when we look at our UBI tax plan, we see that every dollar earned, other than the UBI itself, is taxed at the same rate. Therefore, any income that you would contribute to your RRSP would get taxed at the same rate when you withdraw it (assuming the federal government hasn’t changed the tax rate since you made your RRSP contribution).
Therefore, the federal government might decide to phase out the RRSP program in exchange for an increased contribution room in the Tax-Free Savings Account (TFSA) program.
Would a UBI help reduce the spread of the coronavirus?
During the ongoing coronavirus pandemic, many nations around the world, including Canada, have implemented measures to limit any non-essential movement of people within or across their borders.
The economic effects of these actions are already being felt around the world. There is no doubt that this can severely affect those who receive income from jobs involving interactions with large groups of people such as: restaurants, bars, theatres, sports events, etc.
A UBI could have made it easier for workers in these sectors to stay at home, without risking great financial stress. In turn, workers may have started staying at home earlier or have decided to work fewer hours, if they knew they would still have a stable stream of income to tide them over for the coming weeks.
This earlier response could then reduce the overall number of cases of COVID-19 that Canada will eventually see by the end of the pandemic.
What would a universal basic income look like in Canada?
The direct and indirect effects of implementing a universal basic income program in Canada cannot be known with certainty unless it is put in practice, however we can attempt to respond to this question with the following answers:
- A universal basic income would be set at $16 500 per year or $1375 per month and would be tax exempt.
- A flat federal income tax of 42–47% on all income would need to be implemented.
- It is estimated that 59–67% of Canadians could directly benefit from this federal income tax plan.
- Conversely, 33–41% of Canadians would need to pay more federal income tax to help fund the UBI program.
- A reduction in full-time work might be observed with a simultaneous increase in part-time work. This might increase overall employment, while keeping the total number of working hours by Canadians approximately constant.
- Provincial governments could see reduced spending on welfare, allowing them to increase spending elsewhere or cut taxes.
- The cost of housing could normalize across Canada’s major cities due to Canadians moving from expensive cities to more affordable ones.
- The RRSP program may be phased out in favour of a larger TFSA contribution limit.
- A UBI could be helpful during times of global uncertainty such as the ongoing coronavirus pandemic.
This article was originally published on Medium on March 18, 2020.
Machine learning enthusiast. I also write about socioeconomic topics in Canada.