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Minimum Income: What You Should Know About The Idea That Could Revolutionize The 21st Century

$10,000 For Everybody? Why A Guaranteed Income Just Could Work
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Imagine the government started handing out $10,000 annually to every adult in the country, or implemented a negative income tax rate so that low earners and people out of work would receive tax money instead of paying it.

Sounds like the ultimate socialist scheme, doesn’t it? Exactly the sort of thing the business community and conservative economists would label a job-killing farce destined to create a nation of lazy, uncompetitive good-for-nothings.

But a growing number of economic thinkers -- and not only on the left -- are saying it could be the exact opposite: that it could be the policy idea of the century. While not exactly a silver bullet to solve all ills, it could eliminate poverty to a great extent, and set the stage for a healthier and more productive society.

And if that idea appeals primarily to those on the left, there is one principal reason why it would appeal to those on the right as well: It promises to reduce the size and intrusiveness of government.

Glen Hodgson, an economist with the Conference Board of Canada who wrote a policy paper in 2011 calling for study on a minimum income, sees it replacing what he calls a “dog’s breakfast” of social spending programs. Welfare, EI, various tax credits for parents and low-income families could all be replaced by one payment program.

If designed properly, a single, universal plan to support low-income Canadians would remove the “welfare wall” that keeps some people dependent on social assistance, Hodgson argued in his paper, and would actually strengthen the economy by creating better incentives for work.

Hugh Segal, a former Senator and cabinet minister in the Progressive Conservative government of Brian Mulroney, and one of Canada’s highest profile supporters of a guaranteed income, echoes a lot of Hodgson’s points.

“We don’t want to confront the fact that our safety net is not strong enough to raise people out of poverty but is strong enough to entrap people,” he told HuffPost Canada in an interview two years ago.

Hugh Segal

In Segal’s view, a minimum income would mean a significant clawing back of government involvement in citizens’ lives, and the elimination of the “judgmental” aspects of social programs like welfare and EI -- government officers deciding who is and who isn’t worthy of aid.

Instituting a guaranteed income would end “micromanagement by provincial civil servants” and would raise the dignity of low-income citizens, he argues.

Segal points out that a guaranteed income already exists in Canada -- in the form of Old Age Security and the Guaranteed Income Supplement, which act as a minimum income for seniors.

He notes that when Ontario led the way in creating an income supplement for seniors in the mid-1970s, it reduced the poverty rate among them to 3 per cent from 30 per cent practically overnight.

“If we trusted seniors to manage that money, I don’t know why we wouldn’t trust people in their forties and fifties,” Segal says.

Segal has been arguing for the idea for decades, but the notion has taken on a life of its own in recent years, and is now the subject of experiments in the developing world and a part of the political debate in some European countries.

There are a growing number of economic arguments being made in favour of the idea as well, though most people seriously looking at a minimum income are calling for more research -- much more research -- to be done. Here are some core facts to know about what may be the first big policy idea of the 21st century.

How would a minimum income work?

There are two overall types of guaranteed income models: The universal basic income (UBI) and the negative income tax (NIT) rate. These two models are very different and would likely have different outcomes, but unfortunately in the public debate about minimum income they are talked about interchangeably.

Under a negative income tax, there would be an income cutoff point below which your tax rate would be negative -- the government would pay you instead of the other way around. The less you earn, the larger your tax “return.”

This would probably be the less-expensive of the two models, but it poses administrative problems. If you lose your job and your income falls below the cutoff, the government won’t respond until you file your income tax return next spring. So, what do you do instead? Monthly income tax filings?

One way to eliminate those problems would be to implement the other minimum income model, the universal basic income. Under the UBI, every adult gets a monthly cheque from the government, regardless of their income or circumstances. That would solve the administrative problems of the NIT, but political objections to this could be stronger. After all, everyone would get this cheque, including billionaires. For higher earners that cheque would be offset by income taxes, but the optics of a “money for everyone” plan could be problematic.

If campaigners get their way, the Swiss could soon be voting on the implementation of a minimum income.

Where is it happening? Where are they discussing the idea?

There have been a number of guaranteed income experiments done over the years, primarily in the developing world by groups experimenting with new ideas for alleviating poverty. There was also a series of experiments carried out in the U.S. in the 1970s by the Nixon administration; those “income maintenance experiments’ took place in Colorado, Indiana, Iowa, New Jersey, North Carolina and Washington. There was one such experiment in Canada in the Trudeau era, in Dauphin, Manitoba.

In Switzerland, there is a campaign currently running to hold a referendum on a universal basic income. The Swiss proposal would see each adult receive 30,000 Swiss francs, or about CAD$35,000, per year. That is a far more generous plan than most basic income proposals. That referendum, if it takes place, is still a year or two away.

Why now?

One argument being made today has to do with the massive explosion of automation in the digital era. A 2013 study from Oxford’s Martin School estimated that 47 per cent of today’s jobs are at risk of being replaced by machines within 20 years.

In the long run, that may not be a problem. Most economists point out that we’ve gone through similar job-destroying automation processes before (like the invention of the assembly line) and new jobs have always taken their place.

But in the short run, we could be facing a major problem. If new industries and activities don’t take the place of disappearing jobs fast enough, we could see a similar sort of displacement and impoverishment as seen in the early years of the industrial revolution, when many skilled craftsmen were put out of work by machinery.

In a 2013 article, Nobel prize-winning economist and liberal pundit Paul Krugman argued for a minimum income as a way of cushioning the blow from the automation revolution -- a way of ensuring the middle class isn’t decimated in this transition to a new economy.

In an economy like this, “the only way we could have anything resembling a middle-class society ... would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too,” Krugman concluded.

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Would some people stop working if there was a minimum income?

Plenty of (mostly conservative) thinkers have argued that a guaranteed income would mean fewer productive people because some portion of the population would be happy living off the government subsidy and wouldn’t work.

In a recent article, entrepreneur Pascal-Emmanuel Gobry cited the experiments with a negative income tax in the U.S. and Canada in the 1970s, citing research showing that the programs did reduce the incentive to work.

But things aren’t quite so clear cut. First of all, the experiments in the 1970s looked only at the negative income tax, and not a universal basic income. Secondly, the most thorough study of the Canadian experiment in Manitoba concluded that it did not disincentivize work -- or at least not in the way critics expect. There was some dropout from the workforce in Dauphin when the "mincome" experiment was running, but it consisted largely of younger people looking to further their education, or parents choosing to spend time with young children.

Finally, some researchers have concluded that the disincentive to work in those U.S. experiments often consisted of employed people hiding their income so they could get larger sums from the government.

Recent research suggests that while the negative income tax would create some disincentive to work, or at least cause people to hide their income, the basic income wouldn’t. That was the conclusion of Ed Dolan, the founder of the American Institute of Business and Economics in Moscow.

Dolan argues that it’s actually existing social programs like employment insurance and welfare that disincentivize work because recipients lose those benefits when their circumstances improve. But with a basic income, everyone gets the same no matter what, and there is no additional disincentive to getting a job and earning more money.

A recent experiment by Oxfam seems to have borne out Dolan’s predictions. The aid group handed out a basic income to residents of eight farming villages in India and compared the results to 12 villages that received no basic income.

The villages with a basic income saw “improvements in child nutrition, child and adult health, schooling attendance and performance, sanitation, economic activity and earned incomes, and the socio-economic status of women, the elderly and the disabled,” wrote Guy Standing, a professor at the University of London.

Interestingly, a basic income made it easier for people to start up their own businesses.

Of course, an experiment in farming villages in the developing world tells us little about how it would work across an advanced economy, which is why economists continue to call for more experiments on guaranteed income.

How much would a minimum income cost?

That depends on what kind of program it is and how generous it is. The negative income tax rate would be easier to make revenue-neutral (i.e., no tax hikes) than a basic income.

One recent estimate puts the cost of bringing everyone in Canada up to the poverty line at $32 billion. A negative income tax rate could be set so that it would cost that much, and the reduced costs from other now-eliminated or scaled-back social programs could offset that cost.

In fact, a negative tax rate “might produce sizable net fiscal savings, especially for provinces,” the Conference Board of Canada said in its 2011 research paper. That’s because of the reduced burden on the health care system as a result of everyone being granted a basic standard of living. Poverty and health care costs are statistically linked.

And because it would reduce the “welfare wall” that keeps people dependent on government handouts, it would mean more people engaged in the workforce, and that would raise government revenue in the long run, the Conference Board report argued. From that perspective, there is no increase in costs to government associated with a negative income tax.

But a basic income, issued to everyone, would likely require higher government revenue even if other social programs were cancelled.

Assuming an annual basic income payment of $10,000 (about 20 per cent of average earnings) to every adult over the age of 20 (27.7 million Canadians), the total payout would come to $277 billion. A scary number, larger even than the $215 billion governments spend on health care, but then you subtract much of the cost of the $139 billion in payments governments make to Canadians currently, and you basically cut that cost in half. Plus, you've just given everyone (including high earners) a $10,000 tax break, so you would offset that with higher income tax rates.

Or, as Paul Krugman suggests, slap the added tax burden on corporations. They are seeing an ever-larger share of total income, so they are in a better position to pay, he argues.

Depending on whom you ask, a company like Walmart will either feel pressure to raise wages under a minimum income -- or it would have more freedom to underpay workers than ever.

What would the impact be on businesses and the labour market?

There are basically two schools of thought here. One school says that a guaranteed income would make people less dependent on their jobs, giving them more leverage in negotiating wages or the option to hold out for a better job. That’s a positive for workers but a negative for businesses, who would see their labour costs rise.

(It could also give people more opportunity to go to school or retrain for new jobs, which in the long run should help the economy by creating a more adaptable, flexible workforce.)

But the other school of thought says the opposite would happen. With a guaranteed income, low-wage employers like Walmart or McDonald’s would feel little pressure to pay better wages. That would be a bonus for employers, who would save on pay hikes, but that could end up offsetting some of the benefits to low-income workers.

A minimum income would certainly smooth out incomes for people in seasonal work, and make it possible for some people to make ends meet working a part-time job when that's all that's available. But, again, that could translate into companies becoming reliant on the minimum income, and being more trigger-happy with layoffs.

Who’s opposed to the basic income, and who supports it?

These days, the guaranteed income idea belongs to neither right nor left. In the U.S., the negative income tax was championed by Milton Friedman, the grandfather of modern conservative economics and a noted libertarian. In Canada, the idea was popular among some Progressive Conservatives of the Robert Stanfield era in the 1960s, from which hails Hugh Segal.

The Liberal Party of Canada earlier this year made running a pilot project for a basic income supplement a part of its policy platform. That doesn’t necessarily mean it will run on the issue as part of its election platform in 2015, but it’s a significant step forward for the idea.

The pro-business Conference Board of Canada has also come out in favour of at least studying a guaranteed income, and the Green Party endorsed the notion as part of its platform.

But concerns about the potential costs of a minimum income, whether founded or unfounded, combined with moral arguments against “giving everyone free money,” would likely form the backbone of the opposition to the idea.

The Liberal Party of Canada under Justin Trudeau has adopted studying a "basic income supplement" as part of its policy platform, but it won't necessarily be a part of the party's campaign platform.

What are the obstacles to making it happen?

Introducing a guaranteed income would shake up society and the economy in the 21st century no less than the introduction of the minimum wage and old age security did in the 20th, and maybe more.

That’s the single biggest obstacle — the generalized, collective fear of moving ahead with a radical change to society. But beyond that, there are specific obstacles.

One is that “the business community has not engaged in the issue,” says Hugh Segal. He notes that previous fundamental shifts in policy like this required the business community to step up and get involved before the changes could be made a reality.

The business community could engage in the issue in a negative way. If the guaranteed income proposal were to mean higher business taxes, and if business leaders believed the plan would raise labour costs, they could oppose it on those grounds.

But there would inevitably be resistance from the other side as well. The labour unions that represent the civil servants who administer existing social programs could see a minimum income as an existential threat. Many -- if not most -- jobs related to these programs would become redundant.

There is “a bias in bureaucracies not to stir things up,” Segal says, and giving up their discretion to control programs would be “unpalatable” to them.

If the opposition to the idea is an ad hoc coalition of left and right, then the movement to support it will also probably have to be a coalition of the left and right.

And it would have to be a coalition across levels of government too; a minimum income would take the place of programs at the federal, provincial and even municipal levels, meaning an enormous amount of co-operation across governments would be needed.

“It would require a visionary government” to get the ball rolling, the Conference Board’s Glen Hodgson says.

And not just any visionary government: One that’s willing to fight on both sides of the political fence.

Some of the quotes in this story were based on interviews carried out with Glen Hodgson and Hugh Segal in December, 2012.

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