| || ||Glen Hodgson |
Senior Vice-President and Chief Economist
Forecasting and Analysis
There is little talk today among thought-leaders in Canada of a guaranteed annual income, or GAI, as an efficient and effective way to combat poverty—despite mounting evidence of rising social inequality and never-ending concerns about social exclusion. The Conference Board’s recent analysis under How Canada Performs highlighted growing income inequality among Canadians. Although it has a low profile at present, a GAI is a fascinating idea that could simultaneously serve economic, social and fiscal interests, and could be embraced across the political spectrum.
What is a guaranteed annual income? It is a minimum level of income for every individual or family in the country, delivered without condition through the existing income tax system. Earned income above the GAI could be taxed at a relatively low marginal rate, raising net income for the individual and encouraging them to work.
The concept behind a guaranteed annual income comes (surprisingly to some) from free-market economic thinkers. Fifty years ago, Milton Friedman developed an idea called a “negative income tax” to address poverty with minimal government bureaucracy while increasing workforce attachment. Friedman saw personal liberty and minimizing the role of government as fundamental values, and the negative income tax provided a way for him to address the reality of poverty with minimal state intervention. But other prominent economists like James Tobin also supported the GAI concept, which was debated at great length in the U.S. and Canada in the 1970s but never implemented. In Canada, Senator Hugh Segal has been a prominent advocate of a GAI. 1
There are three main advantages to a GAI. First, it would address poverty directly, and in a neutral fashion, via transfers provided through a single existing administrative system—the income tax system. A GAI would streamline existing social welfare programs into one universal system, reducing public administration and intervention with related savings.
Second, a properly-designed GAI could reduce the “welfare wall” of high marginal tax rates on earned income for the working poor. Earned income could be taxed at low marginal rates, providing a strong incentive for GAI recipients to work and earn more. As they work more, GAI recipients would essentially pay for a growing portion of their own GAI, through income taxes on their employment earnings.
And third, a GAI could reduce health care spending on low-income persons. The link between poverty and poor health is widely documented; so if a GAI reduced the prevalence of poverty, it could create better health outcomes and help to slow the rising costs of publicly-funded health care. The current tight fiscal situation means we should be interested in big ideas—like a GAI—that could reduce cost pressures on the health care system.
Nice idea in theory, but would it work in practice? As evidence, a social experiment called "MINCOME" was conducted by the Government of Manitoba in the 1970s, testing the impact of a GAI on the population of Dauphin, Manitoba. All Dauphin families were guaranteed an income of 60 per cent of the low-income cut-off (or LICO), as set by Statistics Canada, a level of income comparable to that under existing welfare schemes. Each dollar of income from other sources was taxed at a relatively high marginal rate of 50 per cent.
An excellent recent paper by Evelyn Forget provides analysis of the health and social impacts of the MINCOME experiment.2 Using data sources that (remarkably) had never before been assembled, Ms Forget demonstrates that hospitalization rates of MINCOME recipients fell by 8.5 per cent relative to similar non-recipients. Visits to doctors declined, especially for mental health concerns—meaning that the GAI appears to have produced a significant reduction in provincial health spending on the target population. More adolescents stayed in school to grade 12. Marital stability was maintained, and there was no evidence that fertility rates increased, or that birth outcomes changed. In short, the MINCOME experiment appears to have had some important success in terms of improving population health and reducing health costs, with few negative social costs.
If the MINCOME results could be reproduced and generalized across Canadian society, a GAI might produce sizable net fiscal savings, especially for provinces. A GAI that delivered income support through the tax system would allow the existing provincial welfare bureaucracy to be sharply reduced. Improved population health for lower-income persons could create savings on health care, through reduced hospitalization and fewer visits to doctors. And if the GAI system were properly calibrated to lower the welfare wall, greater labour force attachment and higher net income tax revenues could be achieved.
Some important obstacles would have to be addressed. An exceptional degree of federal-provincial cooperation would be required on fiscal arrangements if a guaranteed annual income were to become a reality. The costs and benefits of a GAI system would have to be assessed carefully, with detailed research and economic modelling of key elements like the level of income support and the marginal tax rate for earned income.
We expect that economic factors—like continued fiscal deficits, ever-rising provincial health care costs and tightening labour markets—would be the political drivers for GAI reform, more than social concerns. But there are solid economic, fiscal and social reasons to give a GAI serious consideration. If properly designed and implemented, the introduction of a GAI could be one of those rare moments in public policy when a win-win-win outcome is achieved, for society and for the individuals and families affected.
While deeper analysis would be needed to underpin the policy debate, a guaranteed annual income remains an appealing “big idea” whose time has yet to arrive politically. There is no better time than right now to heat up the debate.