Tuesday, March 1, 2016

An Ontario basic income pilot design

The latest Ontario Liberal Budget includes the plan/vow/promise to design a basic income pilot.  This paper advises on important design criteria to avoid a politicized feel good pilot destined to fail.

Let me presume the dominant political motive for the Ontario Liberal Party (OLP)'s consideration of basic income is primarily poverty elimination, but with  secondary considerations that conditional welfare systems carry high administration costs and trap recipients into staying dependent on welfare permission.

Basic income is an unconditional cash entitlement given to every resident citizen.  Other philosophical justifications include the citizen's right to an equal share of government revenue for greater voice in how social funds are spent, and generally lower subservience to market, institutional, and state forces.  How to Fund UBI at a national level is worth reading first.

Absolute pilot design principles
  1. Any clawback rate (from earned income) on basic income benefits must be limited to 20%, and should be minimized.  If higher clawback rates are used, the program is setup to fail by duplicating the traps of conditional welfare systems.
  2. A pilot should be funded for at least 5 years, and provide the impression that it will be permanent.  People who use UBI to fund education or entrepreneurship need time to develop earning potential.  Some  people need more time to adjust to income security before contributing to society.
  3. A revenue/funding model should be included in the pilot, likely requiring assistance from Revenue Canada.  Revenue initiatives include clawbacks and surtaxes on income (or sales/property surtaxes), and diversion of funding from eliminated programs.  Ideally, the revenue model should not be limited to funding from low income workers.
  4. Data collection protocol, and commitment to form conclusions is necessary to refute the conjectures of  critics of basic income.

The Dauphin Manitoba 1970s pilot
The 1970s pilot program in Manitoba failed the absolute pilot design principles.  Successful findings from Dauphin include:
  • Mass approval from community members
  • Incredibly high education rates.
  • Better health outcomes, especially surrounding mental health, and emergency room patronage.
  • Claims of insignificant employment rate differences.
If an Ontario pilot replicates the mistakes of the Dauphin experiment, then it is an absolute waste of time designed only to delay full UBI implementation.  Of course people will support free money, and of course it will improve people's lives, and of course young people free of the financial constraints to pursue education choose to pursue education.

The mistakes of the Dauphin experiment were that it included a 50% clawback rate on income, funding the program only through the incomes of those who made under $40000 (in 2011 dollars), and was a short term political stunt without review follow through.  It was through the hard work of Evelyn Forget that the above findings were determined, but there is uncertainty with the raw data she did not look at, and the temporary short duration of the study makes employment conclusions impossible.

Evelyn Forget has made the disturbingly wrong recent policy advice of a 50% clawback to basic income.  In addition to perpetuating welfare traps, and unfairly imposing the entirety of funding on lower income Canadians, it also fails to obtain the informed political buy-in of providing benefits for 80% or 90% of Canadians with personal benefits of UBI, rather than yet another program that just benefits other people than themselves.

Measuring the success of a UBI pilot
  • Community wealth (housing unit numbers and prices) and income is the primary measure.  Not employment rate.  Number of businesses, their sales, and number of employees is a primary measure of community health because sales (and growth) exist because a community is healthy and in aggregate confident in its individual future.  Businesses with local community (retail and local services) sales should be tracked independently of non local/retail (manufacturing/software/IP) businesses.  The former's success depends on the general communinity health fostered by UBI, while the latter depends on the opportunities that UBI funds.  Inflation is a related concern to community wealth and income.
  • Crime, health, education, children's outcomes, family cohesion, and social productivity contribution rates are all of interest.  The first 2 are the most important.  Formal education rates are a useful social metric, but it doesn't capture informal learning.  Social productivity contributions is a catchall for doing something that is generally socially sanctioned: work, school, volunteering, child care, projects, publishing...
  • While critics of basic income worry about individual unproductivity, its not important.  We already know whether a car is a useful purchase, and there is a relatively fixed number of employment opportunities related to producing and selling cars, and there is a simple and straightforward path to filling all needed employment in the field.  Similarly fixed employment opportunities exist in professional sports.  The only new opportunities are those that don't exist, and customers don't know about yet.  People effectively creating their own employment.  While there will be interest in employment rates, it has no bearing on the community pilot success.  Its not the 2 or 5 out of 10 that continue to "under perform" under UBI as under welfare that matter, its the 1 or 5 out of 10, 100 or 1000 that is a success story because of UBI.
  • The reason for including costs in a UBI pilot program is to measure the political impact of complainers.  Some privileged with dignity will take great offense that dignity be extended to everyone else.  Some will threaten to leave because taxes oppress them from being able to afford a bigger boat.  Some will say anything to preserve redundant public funded jobs.  Including costs further ensures that the pilot itself is affordable and helps gauge community interest since a free money program would have everyone sign up.

Community based or signup based program
A community based pilot program (where a city or region is selected) makes the most sense for study in part because whole community effects can be measured, but also because some public funded programs are delivered at a community level, and more budget savings are possible if a community service is cut.

A signup based program is one where participants would apply/sign up in exchange for a tax election that includes income surtaxes and renouncing other support programs.  One useful aspect of a signup based program is as a simple survey:  A second stage of the pilot used to gauge public support for UBI rollout throughout the province.   But another use has to do with private funding partnership (called ULI) that will be detailed later.

Deciding on a UBI amount
As a single reference point, the amount should be sufficient for someone who has the aptitude to get admission to post secondary institutions, to be able to afford doing so independently.  This amount happens to be likely to also be enough to not create complaints for the elimination of EI, welfare, and disability benefits.

UBI is a better program than student aid because while post secondary education is an excellent program for smart young people who don't know what to do with the rest of their lives, not everyone fits that category, and helping everyone equally is not only better for everyone, but it leaves institutional slots open for those who benefit the most from post-secondary education.

$15000  per year has been the amount I've recommended consistently for allowing a personal development budget, and sufficient to eliminate all other transfer and social programs.  For a pilot, seniors already have a federal basic income program, and so UBI should only apply to those under 65.  $15000 is still the right amount, even if there is a lower amount that satisfies the "main criteria"  A personal development budget that also eases childcare is also one that substantially contributes to community income and core success of the program and everyone participating.

Funding of UBI pilot
A provincial pilot has some limitations in adjusting national and province wide tax policy, but there is still some flexibility:

  1. EI and CPP premiums for the community can be diverted to the UBI fund.  Those who really want CPP for their retirement, can use their UBI to invest in safe assets such as paying down their mortgage or GICs/Bonds.
  2. The blatant great injustice of preferential tax rates on investment income ($22k capital gains income is taxed at 0 with a 11% marginal rate, while the same employment income generates 27.5% tax revenue, with 37% marginal rate) is not merely unfair, it unfairly discourages more the effort of low wage labour compared to the effort of investing, and steers investors towards tax preferential potential lies of future promises instead of more secure investment income.  The full solution of allowing a corporate tax deduction for dividends paid by corporations is not possible in a pilot, but provincial surtaxes on investment income for the UBI pilot community are possible, including taking the entire share that the federal government should be doing.  The surtaxes would be lower than if the proper corporate tax reform were implemented.  A surtax should not only reverse the preferential rate treatment of investment income, it should also capture CPP/EI premiums/revenue that would be placed on such income if it were treated equivalently to employment income.  The continuity rules for capital losses should be preserved.
  3. A small surtax on higher incomes needed to top up funding.  UBI provides high income Ontarians with a safety net too.  Benefits low/middle income investors and landlords directly.  Benefits their non-working spouses and post secondary aged children, and so eases family lifestyles/values.  A portion of this surtax can be allocated to payer's CPP funding.
  4. For the pilot community, elimination of the federal and provincial basic exemption amounts (for income below $11k), trillium/GST/Property tax, and Northern resident credits.  This is over $3000 in funding from low and middle income workers.
A $15k basic income with a 20% NIT rate to $75k 
This differs from my standard recommendation but has some simplicity to it, and will be tweaked in ULI section.  Of the 20% clawback, it is only 5% over and above existing EI/CPP remittances on income up to $50k.  It does mean a higher tax rate on income over $50k.

The major problem with a clawback system that effectively reduces basic income by 20% to 0 when earned income gets to $75k, and then removes the clawback tax on income above $75k.  Such corruptions of the tax code already exist specifically with EI/CPP contribution ceiling, but the specific damage such a tax cliff causes society is that it promotes hoarding of high income work.  Progressive rates promote job sharing.  2 $75k jobs promotes 2 families, 2 homes, 2 cars.  1 $150k job only creates one of each of these.  Any tax code that has a lower step tax bracket, encourages too many high paying jobs at the expense of a larger number of decent jobs.  More importantly, any drop in tax brackets means that there is an option to lower low income tax brackets for the same social revenue without the gift to higher income brackets.

Despite these problems, we will keep this general model.  In part because a $75k cutoff is very different than a $20k cutoff, and harder to game.

ULI:  Unconditional Loan Income
ULI is structured as a loan rather than a grant.  It is a loan without fixed repayment obligation.  Instead a royalty on income is paid until past loans are paid off.  The loans do not need to carry interest, but if they do, they must be universally accepted as non-usurious (max interest rate of 2%, with 100% cap on total interest).  ULI, like UBI, is completely permissionless.

While a $15k/year, 20% income payback royaty, ULI benefit is functionally equivalent to a 20% negative income tax up to $75k income, there are a few differences:

  1. Income over $75k can still be taxed to repay previous years' ULI balances.  NIT does not capture this.  So someone relying on ULI to fund a lengthy postgraduate degree who then consistently earns 6 figures will end up repaying his past benefits.
  2. A personal balance of receipts and payments is especially useful for pilot programs.  Statistics tracking individual outcomes are enabled.  If repayments managed through Revenue Canada, no private tax information other than repayment amount is shared with pilot administrator.
  3. A personal balance allows retaining a repayment expectation if recipients move out of the community on their future income.
  4. For those with good and stable employment, its possible to use ULI similarly to EI.  As an emergency fund, where the bulk of ULI receipts are delayed until the last half of the year.  This is a benefit for higher income Canadians who can afford to ignore UBI/ULI unless they directly experience income instability.  Delaying ULI receipts in the year can mean not repaying it during time of unemployment, or can be used for emergency home or car repair.
  5. ULI allows for private partnerships in funding.  Public funds can guarantee principal far future repayments.  Guaranteed principal notes become eligible to Central bank repurchase mandates.
  6. A ULI program funded privately can cost 3%-5% for the guarantor province compared to a UBI program.  Though private funding partnerships are only realistic under a signup pilot model, where private funders have some power to nominate recipients for a partial amount of the funding they provide. (another potential for private funding help is community fundraising effort)
  7. ULI is somewhat similar to insurance schemes (such as EI) Canadians understand, except recipients pay for benefits after receiving them rather than prefunding a benefit pool.
  8. A community centered but individual ULI program allows the community to lock in ULI eligibility at the beginning of the ULI pilot, and thus provide budgetary certainty for the pilot.  Immigration to that community (despite being ineligible for ULI) would be another measure of UBI success.
  9. Specific to pilot program funding, ULI persists repayment obligations after the pilot is terminated (though royalty payback rate may be adjusted down).  An NIT would not.  Together with points 1, 3 and 8, these are the main reasons to recommend ULI over UBI.  Its fundable with lower tax rates, and society's UBI investment in people and their future is better protected with some individual accountability for the investment.
  10. ULI royalty paybacks are more compatible with the corrupt individualist programming that denies social gratitude for individual success, and wishes to inflict slavery on the less fortunate.  It more directly creates individual accountability compared to a tax, and lessens the oppression-dementia related to paying for other people.
  11. ULI is still socially funded.  But there is simply a more direct and understandable link between social payments made by the successful and the past aid and services they personally enjoyed and are now repaying.

The decision whether to include a signup model for UBI pilot
 I recommend a community/geographical based pilot (ULI based) as the main program.  Its possible to still consider a signup model as a supplementary expansion of the UBI pilot beyond the chosen geographies.

The main feature of a targeted (signup) ULI program is that funders of the main ULI outlays get to nominate who receives ULI for a 5 year period (details in this paper).  There can be many restrictions on what portion of ULI can be targetted to a nominated beneficiary, and even though there is nomination, the ULI funders hold a basket of all ULI issued during a period, instead of a loan to a nominated individual.

The biggest disadvantage of such a scheme is the pure direct explicit cronyism built into it.  Yet there is still a case for it:

The primary "funding client" that would benefit from targeted/voluntary signup ULI is the province of Ontario itself:  All homeless people are the most obvious candidates for overall program savings, but any social assistance/disability/housing client at risk of long term service, can be served more efficiently and effectively through UBI.  Released prisoners, and first nations communities could also fall in the category.

But rather than take my word for it, or that of a critic, a UBI pilot allows the province to accept half (or any portion) of applicants to a ULI program, while the other half acts as control.  Signup based pilot portion further allows the province to experiment with UBI/ULI levels with individual contracts.  As a pilot/study/research project, measuring outcomes for vulnerable groups of interest is the main purpose of validating UBI as a program.

Incentives for private funding support of ULI are mostly centered around people wishing to nominate their family, and businesses nominating their customers.  These specifics are all detailed in the ULI paper, but another motive not discussed in that paper is philanthropic community-centered support, or a group of business and individuals banding together to fund ULI for a community, which brings us to next section

Selecting community(ies) for a UBI/ULI pilot study
First, every community that offers an application proposal that would make UBI budget neutral to the province and federal levels should be automatically accepted.  The ministry of finance will be able to project how much of a budgetary shortfall, diversion of CPP/EI funds creates with the additional 5% clawback rate, and normalization of investment income, and so how much of a surtax on incomes above $75k would be needed.

While a surtax on incomes above $75k or $100k or $150k is deserved (if only because ULI funds their security too, and can directly fund their families), that is not the only funding option, or necessary to fund all of the shortfall.  Applicant communities themselves can find budget savings from their programs, raise property taxes, and/or appeal to businesses to help solidify funding for their pilot program application.

The case for businesses to help fund a community application, is in addition to PR value, increased sales that will necessarily accompany a UBI program.  There is also a strong case that with UBI, significant labour regulations (minimum wage, maximum hours) can be eliminated, as UBI implies an equal bargaining position for labour contracts given potential employee's right to refuse work that they declare to be oppressive, without compromising their survival.  Businesses may also wish to sponsor their employees for UBI, effectively acting as a better short term EI/pension system, and wage supplement.

The case for individuals to assist funding a community application is first, the similar motives of supporting any charity but without the negative of administration costs and uncertainty of program delivery, but also the attractiveness of capital guarantees in a significantly uncertain current investment climate, and even though the expected rate of return on ULI loans is very low, it is a very high yielding/cash flow investment in that large chunks of principal are repaid each year.

Each community's application to the UBI pilot program is going to depend on the community's assessment of provincial and federal spending that they claim will be saved under a UBI program.  Its possible for federal and provincial cooperativeness to disappoint communities applying for the UBI pilot.  After all, politicians saying they are concerned about poverty or climate change has a long history of overshadowing their actual commitments to improving society.

At any rate, if no community applications fully meet the province's criteria for being budget neutral, the province will select among the best applications subject to a spending allocation they are willing to commit to.

Negotiation framework between federal, provincial and municipal levels for pilot
The creation of a UBI pilot program that is revenue neutral to federal and provincial levels is an opportunity for any community that wants UBI to get UBI.

The Province especially (but perhaps federal too) can have significant variance in the social, health and judicial costs that it attributes to each community, and so a different funding bar that each community would need to meet in order to satisfy the provinces view on a budget neutral UBI program for that community.  So there will be a negotiation process between the province and every community that applies.

But to show good will and ease the negotiation burden, the province should declare a budget amount it is willing to "lose"/spend on the UBI pilot, and also set a surtax rate (on incomes over $75k of pilot communities) that would be sufficient to cover all costs for communities the lowest budgetary "burden" to the province, or put another way, communities with high tax revenue and high program expenses.  Again, assuming good will from the province, this surtax should be a little higher than the minimum in order for wealthier communities easily able to meet the funding shortfall to subsidize slightly more needy ones.

If there is obvious agreement on program expenses per community, then the province could provide relatively simple formulas based on existing program enrolees and existing high income earners to allow communities a transparent process for making an application and expecting the process to be a serious merit-based one.

A finalized program and tax proposal
Including the hidden 7.5% payroll taxes paid by employers, the lower income brackets under ULI will pay 42% of income, but only 22% if they don't use ULI.  This is a problem, as its a major revenue loss of 15% (payroll) + 5% on high income Ontarians.

An extremely simple solution that also solves the regressive tax bracket above $75k is to replace payroll taxes with a 12.5% (7.5% employee payroll contribution + 5%) on income up to $50k, and 20% on income from $50k to $75k.  Employer payroll contributions are unaffected.  For those with a ULI balance to repay, that tax (income royalty+employer contribution) is used to repay their ULI balance, and for those without a ULI balance, the tax funds general revenues.

To address the fact, that corporate tax reform is not possible until at least full provincial (if not national) UBI program is in place, and so double taxation of capital gains and dividend income will be in effect for pilot, regular income tax rates on dividend and captital gains will be reduced by 30% (relative to normal employment income, so 16% instead of 22% on first $45k), but 20% of full amount of all non-employment income will be "ULI taxed" for first $75k of income.  Nationally, the full normalization of investment income at just 15% tax raises more revenue than the entire EI program.  $30B.

This may mean that no surtax on income over $75k is necessary.  If so, the ministry may consider lowering the 20% repayment rate, in favour of creating a surtax.

Note that even for someone with employment income of exactly $75k, a tax reduction is obtained, as they are no longer paying $3750 out of pocket in payroll taxes.  A 5% surtax on income over $75k would recapture that $3750 tax cut at $150000 income (ignoring-unfairly- the loss of the basic exemption), and the program overall therefore offers net tax cuts for everyone with employment income of $150000 or less.  Including the $2420 loss of personal exemptions, the 5% surtax allows everyone earning under $101600 a net tax reduction.

The final detail is what to do if or when the pilot is discontinued.  Interest should be frozen.  Royalty repayment rates should be dropped to 7.5% with EI contributions for income up to $50k being applied in their entirety as repayment.  Income exempt from EI contributions would have 7.5% royalty tax applied until ULI balance is repaid.

General affordability overview
I've made better posts on general affordability, but will make a simple analysis here.  Needed because the pilot plan makes compromises with a national program.

With a 42% tax (34.5% without employer payroll contributions, and 27% compared to today's 22% fed and provincial income tax rates) on income under $45000, with an average adult under 65 income of $35714, enough revenue is collected to give every adult under 65, $15k per year.  This "breakeven" average income is overstated due to some people having incomes above $45000, and having higher tax rates.

Since GDP per adult is significantly above that, then all other taxes fund the rest of the government.

Communities applying for UBI pilot
Selling the idea to their residents,
  • ULI, assuming 5% surtax on incomes over $75k, is a net tax cut to everyone earning under $101k, with the provision that income over $75k is also subject to repaying prior year's ULI benefits. 
  • Can raise property taxes $1000 (amount made up), add user fess to libraries, community and rec centers.
  • Can cut services aimed at those earning under $15k/year including police funding.
  • Every adult gets up to $1250/month, reduced by $50 for every $250 in monthly income.
  • The final option to qualify is to request a lower UBI amount than $1250/month.  I don't believe this is necessary given the recommended tax changes, and a lower amount jeopardizes the viability or wisdom of program elimination.  But your community may prefer that to cuts or property tax hikes.
The only people facing some potential of sacrifice are those making over $101k.  But if they have a non working spouse, then the breakeven net tax jumps to $176k.  If they are spending $10k per year on supporting young adult children, then that breakeven income jumps up $50k per adult children.  If high income community members care about low crime and social cohesion, and their income depends on the strength of the local economy (or Canada's after full UBI rollout), then their income gains will surpass their tax increases.  So arguably, no one makes any sacrifices for UBI, assuming public funded workers offered severance can find contentment with their newly available time.
Potential for Toronto to apply?
The out of control police budget ($1B) either needs more crime and persecution to justify it, or more social harmony to cut it.  That is a roughly $1000 per household budget item.

With a large amount of high income earners, and high general program costs and high poverty issues, if other Ontario communities can qualify under revenue neutral provincial rules, it should also be possible for Toronto to qualify.

One controversial area of budget savings is in affordable housing programs.  Toronto has a lengthy waiting list, and on paper up to 60% of citizens qualify, but very few obtain subsidized rent benefits.  There is a way to leverage UBI as a more universal housing benefit at budgetary and tax savings to the community

Questions for the minister of finance
With a $15k/year basic income for those under 65, what provincial budget items could be eliminated, and what savings do they represent on a per tax filer basis?

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