ironphoenix (ironphoenix) wrote,

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Ending poverty?

The Globe and Mail published an interesting article in which the author advances a proposal to "guarantee everyone in Canada $20,000 a year." There are a lot of good reasons for this kind of approach, not least being that for at least some people, it would cost us less overall. Admittedly, certain people would require additional help in managing this money; there is a small proportion of people who, for one reason or another, really can't handle their own finances, and who would benefit from more structured programs, but the second link shows pretty clearly just how tiny a minority that is. The stereotype of welfare and other aid recipients being guzzlers at the governmental teat is by and large just plain wrong, and the obstacles put in their way by both procedures and attitudes do little more than discourage and demean people and use up time and energy they could put to better use gaining skills and taking care of themselves and their families.

If we try this guaranteed income idea, though, a tricky and possibly unexpected problem rears its head. Fortunately, I think it may be solvable: read on!

Let me first define for convenience an incentive rate; this is the increase in after welfare subsidy and tax income on an incremental dollar of earned income (i.e., a marginal rate). For high-income earners (who get no subsidy), it is one minus the marginal tax rate.

Currently, in Ontario, the "Ontario Works" program nominally reduces benefits at 50% of earned income after taxes (Section 49.1.i-ii) (with a tax rate of 20.5%), although a slightly tricky policy (see Section 49.3-4 of the Regulation cited) seems to make the reduction effectively 100% in a number of circumstances. The basic maximum benefit for a single person can be worked out as $7,104 per year. From this, we can calculate that the incentive rate between 0 and $17,871.70 of earned income is 39.3%; above that, the incentive rate jumps to 79.5% until we hit the first magic tax bracket number of $31,278 in earned income. Above that, the incentive rate drops off gradually to 59.84% for incomes above $127,021, half again the best possible rate for low-income earners.

There is a tension between four factors:
  • The minimum welfare benefit
  • The net welfare subsidy-tax zero point
  • The incentive rate for people with high incomes
  • The sustainability of the welfare and taxation program
The second factor, the net welfare subsidy-tax zero point, may need some explanation: it is the earned income level at which the amount paid out in tax exactly matches the amount received in welfare subsidy. In an integrated system, both numbers would be zero, but because they are administered separately, there is in fact a tax payment and a welfare subsidy which balance at this earned income point. Currently in Ontario, this point is $17,381.70 per year of earned income, the first incentive rate "corner" described above.

The higher the minimum welfare benefit, the more will be paid out to each person on welfare, and the lower the low-income incentive rate becomes for a given zero point. The higher the net welfare subsidy-tax zero point, the higher the incentive rate low-income earners, but the more money is needed to subsidize this larger group of low-income workers. The higher the incentive rate for people with high incomes, the less money is available to cover welfare and employment supplements. If we don't get the books to balance out with enough surplus to cover the other government programs, we create a cycle of deficit spending which makes the whole program a temporary, unsustainable indulgence. The socialist extreme is to disregard the third factor and flatten their incentive rate; the libertarian extreme is to disregard the first factor and provide no basic benefit; ignoring the fourth factor and operating on an indefinite deficit has been shown not to work. Avoiding these three pitfalls has led us to where we are today: making the incentive rate for people on welfare dramatically lower than the incentive rate for any other group in Ontario.

If we raise the minimum welfare benefit to $20,000, it becomes quite expensive to maintain any kind of low-income incentive rate at all. Even the existing rate of 39.3% would put the net welfare subsidy-tax zero point at $32,948.93. Consider next that the minimum hourly wage of $10.25 in Ontario equates to approximately $21,320 per year at full-time hours; this means that the government would have to subsidize each full-time minimum wage worker by $11,628.93 per year, instead of receiving $4,370.60 from them in taxes, for a net difference of almost $16,000 per worker.

While it may be politically unpalatable, I think that much of that money should come from a decrease in the high-income incentive rate, which means an increase in the marginal tax rate for high income earners. There would be much well-funded complaining about such a measure, but I have little sympathy: Across Canada, "Average after-tax incomes remained roughly the same for families with incomes in the bottom 20% and the middle 60% between 1976 and 2007 but rose for those in the top income group after 1995. The difference between the top 20% income group and the bottom 20% rose by 37%." The disparities are highest in BC and Ontario. (A more pointed presentation of this can be found here.)

What limits the marginal tax rate I think the high income earners should pay? Fairness first: their incentive rate should not be significantly worse than anyone else's. Second is a more pragmatic limitation: many high income earners, like it or not, are economically significant investors and entrepreneurs, and it is unwise to kill golden egg-laying geese or, what is more likely, drive them to fly away to other ponds. People with a lot of money are less constrained in their mobility than those without it, because they can cover the expenses of relocation and the disruption in income that usually accompanies an international move.

Unfortunately, balancing these things probably still leaves a shortfall in the budget. Where should the money come from? Historically, governments have assumed debt to fund programs, but as a long-term strategy, this merely mortgages the future. I would instead urge the government to simply print the shortfall as cash, and rely on "trickle-up economics." Trickle-down economics is inefficient because wealthy folks tend to save their money, especially in financially troubled times like these. Poorer folks, however, don't have that luxury: a dollar gained is usually a dollar spent on necessities, and thus pumped into demand for real products and services, boosting the real economy rather than the ethereal one of derivatives and hedge funds. This in turn builds up employment opportunities, reducing the load on the government subsidy system as unemployed and underemployed people take up the available work.

We could expect a short-term inflationary bump due to the influx of cash to cover the initial shortfall, and it might in fact be necessary to smooth over the starting impact of that with a certain amount of government debt, but this would need to be a transitional measure at most. The inflation would also be offset by the increase in actual production, reducing scarcity of real goods, especially in necessities, so it would be likely to hit luxury goods harder than basics, so that the usual flat tax effect of inflation would be slanted toward higher income earners.

A guaranteed income has other advantages. Entrepreneurship is a chancy thing, and if one risks ending up penniless and starving on the street, one is less likely to try starting a business. A guaranteed income can support an entrepreneur during the initial launch, and help them recover if it fails. This makes it easier to start a company, and to try again when the first one fails: it usually takes several tries before an entrepreneur finds a winning game. The guaranteed income can also support volunteers, artists, stay-at-home-parents, and others whose work may be useful and productive to society while not being financially sustainable in itself.

Overall, it seems to me that a guaranteed income is probably possible, and even worth trying. Integration of federal and provincial planning would be immensely useful in making it happen, which sadly makes it much harder to achieve in practice. Nevertheless, I can hope that someday, when Harper's Conservatives get replaced by a government that cares about Canadians, we may find someone with the political guts to give it a go.
Tags: economics, politics
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