Saturday, November 7, 2015

UBI funding option for Canada

The right amount for (Universal Basic Income) UBI in Canada is $15k per year.  This is because that is the amount of maximum benefits for old age security in Canada. 

For any country, the correct UBI amount is the benefits of the largest significant program it would replace.  The higher this UBI amount, generally the more money it saves taxpayers since UBI is more efficient than the programs it replaces, and so the net tax burden of people other than the recipients goes down.

Keeping OAS or reducing the age qualification for it as an alternative to UBI
The core philosophy of UBI is that every citizen receives the same amount, and is the citizen's fair share of the tax revenue paid as a dividend.  But an alternative that achieves universal dignity is to modify the existing OAS system either:

  1. Have UBI for those under age 65, and OAS for those above 65.  The UBI benefit can be lower, and because OAS+GIS has a clawback system, and low overhead, paying OAS is cheaper than UBI.
  2. Reduce the age of eligibility of OAS potentially all the way down to age 18.
The Canadian OAS+GIS system is a mix of UBI and NIT(negative income tax)
 OAS is treated exactly like UBI (except for condition that recipient is age 65).  $570 per month to citizens over 65.  GIS (guaranteed income supplement) is also available to those over 65, and is a top up system like Guaranteed minimum income or NIT.  Somewhat complex differences in clawback rates and amounts based on marital status, but for single seniors it is $772/month with 50% surtax/clawback on income.  For a senior couple, it is $1025/month at similar clawback rate.

For a UBI system for those under 65 to be equivalent, it would be $6950/year. + a GMI of $9000 at 50% clawback surtax rate (GIS component).

UBI is affordable at $15k/year amount, but
Its more affordable if the OAS system is kept for those over 65.  While I continue to recommend a UBI level of $15k/year because that amount includes a personal development (or childcare) allowance and can further eliminate higher education and entrepreneurship subsidies while significantly boosting outcomes in those fields, and $15k is  affordable but $12k/year is more affordable.

The core difference between Guaranteed and Basic Income
Guaranteed (topup) income is a scheme where most of the costs are paid for by the poorest workers through high clawbacks from the lowest income levels, provides 0 benefit above a relatively low cutoff level, and still requires tax funding from those receiving no benefits

UBI is funded through relatively small uniform tax hikes that provide net tax advantages (compared to system it replaces) to 80% or 90% of income earners.  The highest earners who face a net tax increase also gain the most from the economic stimulus of UBI, and so everyone should expect a rise in after tax income as a result of UBI.

GMI is poor policy because the high low income clawbacks create cheating opportunities and discourage work in general, but specifically especially discourage part time and part year work.  For this reason, extending OAS+GIS to younger Canadians is not recommended.

BUT, if GMI is relatively small, say $4000, and the clawback rate modest, say 10% surtax on income up to $40k. then the disincentives and cheating opportunities are unlikely to influence anyone's lives, and a $4000 GMI can be a useful supplement to UBI.

A $4000 carbon tax and dividend
We collectively need a carbon tax to curb climate change and sea level rise related to global warming.  Using carbon tax revenue proceeds to distribute as a dividend allows for an average no net change scenario.  Average energy users continuing the same behaviour will receive $4000 and pay $4000 in higher energy costs.  A carbon tax and dividend scheme though allows us all to profit from any personal effort we make to cut carbon emissions.  Also, since poorer citizens may not drive or have smaller homes to heat and cool, a carbon tax tends to be relatively progressive.

Sample breakdown of $4000 carbon tax as it relates to use:

  • $2500 for 500 gallons of gasoline per adult.  Enough to drive 10k miles at 20mpg.  $5/gallon.
  • $1000 for heat and electricity of 900 square foot home per adult.
  • $500 for goods transportation typical of $20k spending on goods (including food) per adult
Those who use less resources than that would have a cash profit.  Those who use more, would be especially incentivized to use part of the $4000 dividend to improve efficiency.

A $4000 carbon tax could be worth an equivalent UBI of $2500 to a stay at home entrepreneur, $3000+ to a student, and $3500+ to someone near homelessness.


$6000 - $8000 of UBI replacing funding has been obtained
The  $8000 in carbon dividend and GMI funding we have found so far is a high benefit to low income people, but very little benefit to middle income people.  Those earning over $40k per year get 0 from GMI, and the energy use of $40k income households may not be very different than the energy use of $100k income housholds, and so they'd receive little net benefit from the carbon tax as well.

from CRA's stats for 2012 tax data

14M of 26.7M tax returns had total income below $40K.  The median income (in the under 40k group) would appear to be around $18k.
5M returns reported an age amount (indicating they are over 65).

This would suggest the net cost of the $4000 GMI amount would be 9M * $2200 = $19.8B.

Ontario's costs for social services is $1000 per taxfiler.  Another $700 per taxfiler for Police/prisons, children services, and government services.  $700 per ontario taxpayer in social, labour, and miscelaneous transfers from the fedral government, with another $300 in equalization payments.

While I cannot find the total amount itemized, another significant combined federal and provincial benefit is the sales and property tax and northern resident credits paid at a clawed back rate to citizens.  I'd guess it averages $500 per tax filer.

An additional $8000 in UBI
The $8000 in GMI and carbon dividend amounts are not enough to eliminate programs, and even if UBI/GMI is a transfer from citizens to citizens, in order to provide value beyond the freedom and dignity of every citizen, program savings need to be made:

$1800 from basic personal deduction (federal) can be eliminated.  Per adult.
$660 from basic personal amount at provincial (ontario) level can be eliminated.
$500 sales, property, and other miscelaneous average credits can be eliminated.
$1000 as a conservative estimate of the up to $2000 in federal and provincial program savings per taxfiler (discussed in previous section).

That is a net cost for an $8000 UBI component of $4040 per 21M eligible Canadians.  or $85B.  with $19.8B GMI cost, the total cost is $105B before savings and additional revenue

Savings and additional revenue are (most items discussed here in greater detail.  A big item is that 14.5% in payroll taxes is being eliminated, but replaced with an equivalent 13% income tax, and 7.5% increase in employment wages (employers would pass along the payroll taxes that they "secretly" pay into employee's salaries.  A 13% tax increase results in equivalent after tax income):
$22B from elimination of EI benefits (revenue remains)
$30B from income normalization of dividend and capital gains income, and 13% "payroll" taxes applied to non-employment income.
$10B from normalization of corporate income and passthrough of their dividend tax credit to shareholder income.
$42B from applying 13% "payroll taxes" on incomes above $50K.
$6.2B   from 11%average tax rate on the 7.5% employment income increase (= 0.24 * 0.075 * 750)

$110.2B in savings and revenue means net savings of $5.2B if other provinces are similar enough to Ontario.  Miscellaneous savings such as healthcare and crime reductions have not been included.  Neither have major tax revenue increases resulting from economic growth resulting from spending most of the $105B in net new personal transfer payments.

Summary of UBI Plan
  • $4000 carbon tax dividend paid to residents including seniors (though reduced amount for seniors is thinkable).  Expected to increase personal net income for those earning less than $60k.
  • $4000 NIT grant paid to residents but not seniors.  10% surtax on income up to $40,000 claws this back.
  • $8000 UBI cash grant to citizens who are not seniors.
  • EI and CPP benefits eliminated.  (CPP already contributed still pays out as scheduled)
  • Current payroll (EI/CPP) taxes on employment income eliminated, and replaced with a 13% Social safety net (SSN) tax.  The 13% tax applies also to income over $50k.
  • All income is treated the same as employment income.
  • Personal income tax rates at federal and provincial level are unchanged except for the removal of the basic personal exemption, and refundable credits including sales and property tax/rent credits.
  • Corporate tax rates may be increased, but corporations receive the privilege of deducting dividend payments as a tax deductible expense.  The dividend recipient pays income tax in the (provincial and federeal) jurisdiction of the corporation.
  • Income taxes are payable by foreign investors and non-citizen residents, but they are excluded from paying SSN tax.
  • SSN tax is paid by Canadians on their foreign income.  Canadians pay both SSN and income taxes on Canadian income.
  • No change to OAS system.  Above benefits except carbon tax applied only to those under 65.  OAS system kicks in above age 65.

Effects on sample Canadians
 The examples below use a generality assumption

No other income
$16000 in cash grants.  $1000 expected higher energy related costs if does not drive.

$20000 employment income
No change in taxes paid, other than loss of $3000 in basic exemption and tax credits.  $10000 UBI+GMI, and expected $1000 benefit from carbon tax dividend.  $8000 additional effective after tax income.

$20000 capital gains income
Currently pays 0 tax.  New taxes $6800 (including 6% provincial).  $11000 cash and net carbon benefits.  $4200 net additional cash, and $24200 after tax income.

$40000 investment income including $20k capital gains income
Likely a millionaire.
currently pays $6300 taxes. New taxes about $13600.  $8000 UBI benefit.  $700 more after tax income

$40k to $50k employment income
No tax changes.  $8000 UBI less loss of $2400 in credits.  $5600 increased income.

$93077 employment income
Breakeven with old scheme.  $5600 extra taxes and $5600 net UBI.

Households with non working spouse
 Get $16000 additional household income, ignoring change in carbon usage from single household member.

$53077 rental interest and business income
Breakeven with old scheme.  $5600 extra taxes and $5600 net UBI.  Likely assets of such a person $1.9M

Every $10000 income above $53077 investment or $93077 employment income
$1300 extra taxes compared to current system.


Notes on $5.2B surplus and alternatives
The projected surplus is conservative as additional savings especially in police and healthcare should materialize, and this is a highly stimulative economic program that will result in  tax revenue increases. 

One option is that for every 1% lowering of the (13%) SSN tax, $10.6B less revenue is collected at 2012 GDP.  Lowering this rate is a fairly equal tax cut accross all income levels.

Carbon tax revenue will go down as a result of people's choices to avoid and conserve such energy.  Economic growth surpluses and other savings will keep the carbon dividend fixed.

Elimination of CPP contributions will also put a higher strain on future GIS payments.  As compensation though, RRSP contributions now save 15% payroll taxes as well, and so are even more attractive than they are today on incomes above $50k/year.  Its conceivable to one day eliminate the OAS system for those over 65, replacing it with the UBI system

Some wage inflation (completely healthy) is expected as a result of UBI scheme.  UBI/GMI automatically grants citizens the bargaining power of refusing work, and so improved work conditions are guaranteed.  Such wage inflation is inherently economic growth.  As is any automation that replaces work whether because it is too expensive or unnecessary.

UBI should grow with productivity and wage inflation.  Some gains can also go towards tax reduction.  While I don't have a fear of UBI being too generous, and it is critically important that it is generous enough to eliminate all other social programs, and the need for them.  Others will have concerns about being too generous.  An appropriate compromise is to ensure a minimum standard generosity, while distributing further gains to tax payers.

UBI system federal marginal tax rates

no payroll surtaxes, and taxes are after the 7.5% employment income raise. So, all tax rates are effectively 7.5% less on comparable current employment income up to $50k.  Employment income above $50k would receive a statutory flat $3750 raise.
  • 38% on income from 0 to $40000
  • 28% on income from  $40000 to $44700
  • 35% on income from  $44700 to $89401
  • 39% on income from  $89401 to $138586
  • 42% on income over $138586 
One alternative use of the surplus would be to move the clawback range for the GMI from 0-40k to 10k-50k or 20k-60k.  While it makes the program more expensive, it reduces the marginal tax rate for the lowest income group to 28%.  Low wage and part time work is a gateway drug to higher wage full time work, but it has the largest discouraging barriers that include taxes, and also include transportation and other non-deductible unpaid time and monetary expenses that can make accepting a job expensive.  This or more generous EITCwould solve the issue.

Justifications for tax reform
We tax low employment income very regressively.  22% in federal and provincial income taxes + 15% (7.5% is hidden and paid by employer) in payroll taxes on income below $50k.  While income taxes rise slightly at 35k, the 15% payroll deductions vanish on income over $50k.  One motivation for UBI is to remove the welfare trap disincentives for work: high clawbacks on earned income that trap people in poverty by not seeing rewards for work.  Part of my objectives in reforming the tax code to accomodate UBI is to eliminate all of these tax code innequalities that are not justifiable.

Raising some taxes is necessary to pay for UBI.  Raising taxes on employment income over $50k (flat 13%) is appropriate because its not a net tax hike until a comfortable $93k income, and UBI provides considerable benefits to a non working spouse.   Whether conservative or liberal, family/couples can create happiness.  UBI achieves this through the tax code without rewarding traditional marriage.  A traditional women's issue of spousal independence is achieved.  A traditional men's issue of family law reform is possible.  UBI promotes family values through cooperation of individuals for advantage rather than trapped interdependence.

Raising taxes on investment income is justified in that the investor class is gaining a fantastic safety net from UBI.  Investment income is highly variable.  The $53077 breakeven (to existing tax code) investment income is reasonably achieved with assets of $1.9M.  The same spousal benefit options exist for investors. Income taxes can not be a disincentive to investing because it usually beats the return expectations of keeping money under a mattress.  A lower tax rate is offered on Canadian's foreign investment income, and so there is no reason for investor flight either.  Furthermore, higher taxes on passive investment income becomes an incentive to engage in active business income pursuits.

Raising taxes on business income is justified by UBI being an even more fantastic safety for business/entrepreneurs than it is for investors.  UBI can pay a business owner's and key employee/partner salaries while they grow the company.  UBI allows pursuing a business idea without obtaining funding permission first, or having the risk, delay and constraint of building up prior savings.  Businesses also already enjoy the tax advantage of being able to deduct expenses, and paying tax only on profit.  Cars, phones, home offices are tax deductible "perks".

Reminder of economic growth effect
14M Canadians currently earning under $40k receiving an average of $7000 UBI cash (higher income Canadians also see benefits from UBI) is a massive stimulus program.  Its also a stimulus program that involves no cronyism or contract bids, and no useless projects.  Businesses and those who want to work will have significant opportunity to collect Canadian's extra income one person at a time.

$100B distributed to Canadians earning below $40k will likely all be respent.  Marginal income for low income earners is almost entirely spent.  Whereas, wealthy individuals and corporations save significant portions of income... by definition, not spending.  If half of the $100B is respent, then half of  that respent, and so on, the total economic spending boost will be $200B.  Over 10% GDP growth, and 10%  tax revenue growth ($25B).

UBI is not just a poverty elimination program, its an economic growth program that includes giving everyone the tools to fund their own personal and economic development.

3 comments:

  1. Thanks for this great post! I run a basic income advocacy group in Ontario and we want to make a short video/animation explaining how UBI might work for Canada. Could we talk about permissions to use some of your concepts/calculations for that video? With proper credits, of course. You can find our group at reddit.com/r/HamiltonBasicIncome.

    Cheers!

    ReplyDelete
    Replies
    1. Yes! I have yet to uncover the secrets of monopolizing tax policy proposals.

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  2. Very detailed post, thanks. The carbon fee of $5/gallon though seems extremely high and unlikely. Unleaded gasoline emits 8.91kg of CO2 per gallon, or ~0.01 tons. Carbon offsets are generally $15-25/ton, so this would cost $0.15-$0.25; i.e., $5/gallon is at least 20x the cost of carbon offsets. $4k/person on average still isn't unreasonable, given firms would primarily absorb the cost of any carbon tax, then passed on to consumers in prices of goods, but your example is way off.

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