The Drafting Table

Considerations on a Universal Basic Income Scenario

Dan Scott -

A universal basic income is an idea that's getting some buzz. I decided to do some rough calculations to see what an implementation would look like.

The Scenario

A universal basic income (UBI) is a concept where everyone in a country/province/state gets a regular cheque from the government. It's usually envisioned to be an amount that's enough to live on, but not enough for luxuries. The money people receive comes with no strings attached and there is no means testing to make sure it only goes to people who need it. Instead, the government plans to get the money back through increased taxes*. The concept is quite elegant. It removes the stigma of being on welfare because everybody receives it. It removes the "trap" that many welfare programs have where finding a job can make someone worse off because entry-level wages are less than the benefits they're receiving while not working. And it is easier and cheaper to administer because there is no need for evaluations or enforcement (dramatized here as a PEI EI PI checking in on someone on pogey) to make sure no one is taking advantage of the program without being eligible (since everyone is eligible).

*Current programs that have the most in common with a UBI are often funded through natural resource royalties, however.

One candidate for US President in 2020, Andrew Yang, includes a UBI in his platform. He is worried that technological changes will leave many people unemployed and in need of an alternate form of provision. His plan is to give every American over 18 $1,000 per month; this would be paid for in part by a value added tax (VAT)—the United States does not currently have a national sales tax. The rest of the cost for this program (around $4 billion per year) would be covered by savings from winding down other welfare programs (plus he thinks there will be less spending on hospitals and prisons if everyone is provided for by a UBI), increased economic activity stimulated by the UBI, and some other taxes such as a carbon tax and a financial transactions tax. The first two items (i.e. VAT and savings) are each expected to raise around $800 million; this only gets to around 40% of the overall price tag, so the plan counts on a lot of extra economic activity being stimulated.

For the scenario in this post, I'm going to consider this plan applied to the province of New Brunswick (since I'm already familiar with a lot of the relevant numbers about the provincial budget and the economy).

Because New Brunswick already has a carbon tax and doesn't have much of a financial industry, I'm going to ignore the other taxes and focus on the VAT. I'm also going to limit this rough analysis to first-order effects, so I won't assume any economic growth will be stimulated. In line with Yang's plan, I'll assume that a VAT and savings on existing welfare programs can make roughly equal contributions.

I'll keep the $1000 per month amount (for simplicity, I'm not going to limit it to 18+, though), as I figure this is enough to live frugally on in New Brunswick. Single adults would probably need to find a roommate, but if they did, there are plenty of apartments in the $700 – $1000 per month range (a third to a half of the income a UBI would provide).

Putting the Cost in Perspective

How much would this cost? The population of New Brunswick is 770,633. Rounding to 750,000, we're looking at:

12 x $1000 x 750,000 = $9,000,000,000

$9 billion dollars ($9000M—to facilitate comparisons between different magnitudes, I'm going to try to keep as much as possible in millions of dollars) is almost equal to the entire provincial budget ($9823M). That means that revenues (including savings found elsewhere) would need to pretty much double what they are now (actually, more than that, since over 20% of the provincial revenue comes from equalization payments). Looked at another way, the provincial GDP of NB is $36,088M ($47,060 per capita) so a UBI would involve 25% of it. These numbers are far from trivial!

The first thing to realize is that taxing the rich would not pay for such a grandiose program. No one is hiding a stash like that! The richest family in NB, the Irvings, have a net wealth of $8230M. Next is Harrison McCain with $3790M, and the third-richest isn't even a billionaire. Even in the extreme case of a 100% wealth tax (i.e. outright confiscation*), the Irving fortune—which took a century to build up—would be burned through in less than a year of funding a UBI. McCain could cover the next five months. Note that this isn't unique to New Brunswick: Washington State has ten times the population and the two richest people in the world; Jeff Bezos could fund a UBI there for 1 year and 8 months, then Bill Gates could take over for the next year.

*Hard assets like factories are difficult to convert into cash quickly, and it would be especially challenging to find a buyer as a jurisdiction with a 100% wealth tax, so the actual proceeds from such a move would be way lower than I'm using in this example

To further emphasize this point, let's consider the entire 1% (around 7500 people in NB). Obviously I don't know their cumulative wealth, but I think I can use a model to estimate the order of magnitude. Zipf's law is often used to model size vs rank relationships. It says that (under the conditions where it is valid, which could plausibly apply to long-tailed wealth distributions) the nth entry in a list will be 1/n the size of the first entry. We saw above that the McCain fortune was about half the size of the Irving fortune (the next entry is less than 1/8, so Zipf's law might be providing an over-estimate here) so at least the first two entries follow this pattern. This model would also imply that the last person in the 1% of NB has a net wealth of $8230M/7500 = $1.1 million. Across Canada, there are 1.3 million millionaires (3.5% of the population) but there are only 376,700 millionaires (1% of the population) if you use the US dollar (i.e. $1.33M Canadian) rather than the Canadian dollar as the cutoff. So it seems plausible for the threshold to be part of the 1% in New Brunswick to be a bit lower (since a lot of Canadian millionaires are simply people who own houses in Toronto or Vancouver).

Starting from the Irvings covering 1 year, McCain 1/2 a year, the next person 1/3 of a year, and so on, I used Clojure to take the sum of the series for 7500 people:

(float (reduce + (take 7500 (map #(/ 1 %) (iterate inc 1)))))
=> 9.499941

So the wealth of the 1% could cover a provincial UBI for less than 10 years. Considering it would cost $1M per hour, once we're out of millionaires, it won't take long to burn through everyone else's wealth (extending the above calculation to the top 2% (15000 people) only extends the timeline to 10.2 years).

To conclude this section, a program as broad-based as a UBI basically requires an equally broad base of funding. That's why the next section will consider a value-added tax (VAT).

Running the Numbers

The HST that we already have is a VAT (more or less). This makes it easier to do a rough analysis of how much it would need to be increased to finance a UBI compared to estimating the revenue a brand new tax might raise. The HST rate is 15%, split between 10% to the province and 5% to the federal government. It currently brings in $1539M, or $154M per percentage point. At the 10% rate that goes to the provincial government, 4.3% of the total provincial GDP is captured; it's not a 1:1 relationship as not all economic activity falls under the purview of a VAT. Note that Yang's plan similarly expects to raise 4.2% of GDP ($800 billion out of the $19 trillion US economy) at a rate of 10%. The difference is that the proceeds of the HST are already spoken for in NB, so it would have to be raised a lot more to pay for a UBI. How much?

Assuming an equal mix of new revenue and savings from winding down other income-support programs (the latter point will be explored further below), the HST must bring in an additional $4500M. Assuming the revenue increases linearly with the rate (also discussed below), this equates to:

$4500M / $154M per pct. = 29 pct.

So 29 percentage points would need to be added to the HST, taking it from the current 15% to a new rate of 44%. What would this look like?

A $2 cup of coffee is currently $2.30 after tax. It would be $2.88 after tax at the new rate. Or, if you went car shopping with a budget of $30,000 you could currently afford a $26,000 car before tax but at the new rate would only be able to afford a $21,000 car before tax. The HST would go from being 13% of the final price to 31% of the final price.

Consider a household (assume 3 people) at the median income of $59,347. If they spend 40% of their income on things within the purview of the HST, they are currently paying $3,100 annually in HST. If each member of the household receives a UBI of $1000 per month, their new income is $95,347 (provided they keep working their existing jobs). If this increase (in addition to previous spending habits) all goes into things that are within the purview of the HST, they'll be paying $18,500 in HST at the new rate. This extra $15,400 in revenue from the median household is a bit shy of half (43%) of what they gain from the UBI. Poorer households (who will spend more on essentials like rent and groceries that are exempt from HST) will have less clawed back and richer houses (if they are spending more) will have more clawed back. As I mentioned above, a program as broad-based as a UBI basically requires an equally broad base of funding and here we see that a middle class household would indeed be paying close to the average amount of tax needed to cover the program (since half of the UBI is intended to be covered by taxes and half by savings).

Moving on to the savings side of the equation, here are some potential sources:

  • New Brunswick spends $168.6M annually on income support ("Transitional Assistance Program and Extended Benefits Program") as part of the Department of Social Development (the department has a budget of $1235M but the biggest slice of that ($547M) goes to seniors and long-term care, and other portions go to support services for people in need rather than direct transfers to them).
  • The Canada Child Benefit provides a maximum of $6639 annually for children under 6 and a maximum of $5602 annually per child age 6 – 17, so a $12,000 annual UBI would be around half covered for minors (from families that were eligible) by the savings from wrapping up this program
  • If you lose your job you can currently receive EI (employment insurance) of a maximum of $562 per week for a maximum of 45 weeks (i.e. up to $25,290 in a year). If EI was replaced by a UBI, people at the high end of this range would not be receiving as much, but they also wouldn't face a deadline where it would run out or paperwork to complete in the meantime. The savings could either go to funding the UBI, or eliminating the EI premiums that employees and employers currently have to pay (up to $860 annually for the former and $1,204 for the latter).
  • Old Age Security has a maximum basic amount of $601.45 per month (with supplements available for low-income seniors), so, similarly to minors, a $1000 per month UBI would be around/over half covered for seniors (who were eligible for OAS) by the savings from wrapping up this program (Note that the CPP (Canada Pension Plan) is something different from OAS; future recipients have been contributing directly to it, so it would be unfair to cancel it, whereas OAS is funded out of the general federal budget).

Most of the above programs are federal, but just as the HST is administered by the federal government and the appropriate amount is transferred to the province, I'm sure an arrangement could be worked out to transfer applicable savings if a UBI was implemented.

However, the amount of savings from wrapping the above programs into a UBI fall far short of the amount assumed (i.e. for the savings to cover an equal amount as the VAT). The current provincial spending on income support is practically negligible compared to the size of a UBI. For some children and seniors, there may be programs that could be wrapped up to cover about half of their UBI with the savings, but these programs are means-tested, so they don't even cover all children and seniors. For working adults we're left with EI as a source of savings. The premiums are a maximum of $2064 per year per employee (split between the employee and the employer)—this would cover only 17% of the UBI rather than the necessary 50%.

This part of the analysis implies that the HST would need to be raised even more than calculated above.

Discussion

In my opinion, a VAT is more logical for funding a UBI than other forms of taxation. Since a UBI is often proposed in the context of forecasts of high unemployment due to automation, an income tax would be a bad idea to fund it since the number of people with income to report would be low. And as I've discussed, a very broad-based source of funding is necessary for such a grandiose program. A VAT is straight-forward to administer and hard to evade (even people working under the table still spend most of their money in legitimate stores). Also, since essentials like groceries are exempt (and maybe utility bills should be added to the exemption), it doesn't have to be a big burden to the poor.

This is good point to discuss tax avoidance, however. While tax evasion involves finding ways to not pay tax that you owe, tax avoidance simply involves altering your behaviour so that you owe less tax. There isn't a legal (or moral) case against doing so. Some taxes (e.g. carbon tax, cigarette tax) are explicitly intended to alter behaviour, but the incentive to change what you're doing is there whether it's the intended effect or a side effect of a tax. A 44% HST is very high. I found Copenhagen to be an expensive city when I was there last year, which I think was partly because Denmark has a 25% VAT. At a substantially higher rate than that, it's not hard to imagine people making significant changes in their spending habits (e.g. waiting to buy clothes and electronics on cross-border shopping trips, living as a snowbird for several months—but not so long as to lose residency and the UBI). These types of behavioural changes mean that the revenue generated by a tax increase will not increase linearly with the tax rate, as I assumed in my analysis above for simplification (this phenomenon is the Laffer curve).

Of course, Yang's UBI plan for the US has a much-easier-to-swallow VAT rate of 10%. I think this points to a big difference between Canada and the US. Here in Canada (at least in most provinces), all the "low hanging fruit" of potential tax revenue has already been picked. We have a national VAT (i.e. the HST), we have a carbon tax—we even pay taxes on our taxes (since the HST is applied to the carbon tax). This puts a lot more constraints on thinking of ways to fund bold new programs in Canada, while in the US it can at least be imagined.

Before moving on to the final section of this post, I want to reiterate that I didn't assume that the UBI would stimulate (or dampen) the economy, whereas it is a significant part of Yang's plan.

Meta-Discussion

Something as large-scale as a universal basic income is almost certain to have a big impact on the overall economy. By necessity, I didn't consider any second-order effects in the analysis above or it would have gotten way too complicated. We can only speculate about what kinds of effects these might be, but some that come to mind include:

  • More consumer spending since many households now have more cashflow (this is in Yang's plan)
  • More inflation and/or more of a trade deficit because there are more consumer dollars to be spent
  • Increases in rent (because landlords' costs (for maintenance, etc.) have gone up due to the higher VAT and they also know how much people can afford to pay)
  • Some people might be more willing to work (no longer caught in a welfare trap where the benefits they'd lose if they got a job exceed the wages they'd be paid) while others might be less willing to work (they can afford rent and groceries without it and are content staying home and playing X-Box)
  • Impacts on migration, such as attracting people who want a bohemian lifestyle while encouraging the most ambitious people to leave for somewhere where the taxes are lower
  • Political effects wherein promises to increase or decrease the UBI become the most prominent feature of election campaigns

As I said, these are only speculation. But whatever effects do occur, they'll cause additional effects from the interactions between them. That makes the kind of analysis above a very rudimentary starting point.

There have been some attempts to study the impacts of a UBI, but they have mostly been small in scale and focused more on how it affects individual recipients. One of the big concerns I have about it is that some potential complex large-scale interaction effects with unforeseeable consequences might be dependent on it being universal—not the sort of thing that can be detected by pilot studies. Politically, a UBI would be almost impossible to cancel (who will vote to stop getting a cheque for $1000 per month) and I've always been a big believer in being very cautious about getting into a situation that you know will be hard to get out of. At the very least, any UBI should be designed with feedback loops that limit its growth rather than magnify it (e.g. index it to the amount of money raised by the VAT not to inflation).

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