Last updated: July 19, 2022 | (En français)
If your money comes from a paycheque, you likely won’t pay for it.
We can fund a basic income without taxing the vast majority of Canadians, while encouraging economic growth. Although there are many ways to fund a basic income, we propose to pay for it with contributions from our financial sector, fewer tax breaks for large companies, and fewer subsidies for the wealthiest.
If your money comes from a paycheque, you likely won’t pay for it. We can fund a national basic income without taxing most Canadians, while encouraging economic growth. While there are many ways to fund a basic income, we propose to pay for it with contributions from our financial sector and by reducing tax breaks for large corporations and subsidies used by the wealthiest.
This is Part 1 in a 2-part series on How to Pay for Basic Income. In this article, we show how to pay for a Guaranteed Basic Income that can reduce poverty by 50%, with little or no impact on most working Canadians while encouraging economic growth. In Part 2, we show 8 ways to pay for Recovery UBI, a more comprehensive program that can reduce poverty by 100%.
If your money comes from a paycheque, you likely won’t pay for it.
We can fund a basic income without taxing the vast majority of Canadians, while encouraging economic growth. Although there are many ways to fund a basic income, we propose to pay for it with contributions from our financial sector, fewer tax breaks for large companies, and fewer subsidies for the wealthiest.
While a majority of Canadians support basic income, polls show that most would not be willing to pay more taxes to help fund it. The intention of this proposal is to show Canadians that we can fund a basic income with little or no impact on most working Canadians while also encouraging economic growth.
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There is no question that we can afford a basic income in Canada. At just 5% of what all levels of government spent in 2020, we could roll out a national Guaranteed Basic Income of approximately $18,300 for individuals (~$1,500/month) and $25,900 for couples (~$2,150/month), based on the most extensively studied costing of a basic income by the Parliamentary Budget Officer (PBO). It would lift 1.6 million families out of poverty, make life more affordable for 7.4 million Canadians including millions of people who work, and create a floor to help all Canadians in times of transition.
We envision this as a starting point for a Guaranteed Basic Income that could plausibly win an election in Canada, from which the program could grow until poverty is ended.
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Currently, conversations about how to finance a basic income are dominated by 3 main sources of funding and various combinations: increasing income taxes, increasing sales taxes, and eliminating tax credits. Raising income or sales taxes is a hard sell to working Canadians and applying them only to the most affluent would not raise enough money. Eliminating tax credits is feasible and the PBO has even costed a revenue neutral way to do so, but this would effectively raise taxes on everyone including low- and middle-income Canadians.
Simply put, most Canadians want a basic income but not if it means their taxes will go up. In order to garner enough support from Canadians and elect a government that will implement basic income, we must show that you can pay for it in a way that would not impact the vast majority of Canadians and would result in a stronger and more productive economy. Therefore, we designed a plan to meet the following criteria:
This plan demonstrates that we can put money into the hands of millions of Canadians who will spend and invest it – directly stimulating our economy – while addressing the most frequent objections to the cost of a basic income: not taxing the vast majority of Canadians to pay for it, and not introducing taxes that could harm the economic productivity of Canada. Instead, we can fund a basic income by removing tax advantages enjoyed by some industries, companies and individuals which are driving wealth and income inequality – and in doing so, creating a fairer tax system.
The Parliamentary Budget Officer (PBO) estimated a gross cost of $81 billion in 2022 for a Guaranteed Basic Income (GBI) modelled after the Ontario Basic Income Pilot. This program would guarantee all Canadians aged 18 to 64 an income of at least 75% of the Low-Income Measure (LIM, a common measure of Canada’s poverty line), or a basic income of about $18,300 for individuals and $25,900 for couples. This basic income would be reduced by $0.50 per dollar of employment income but does not impact pensions, payments to seniors, or children.
In the same report, the PBO estimated $30 billion of federal and provincial tax credits that could be replaced given the design of this basic income model and can therefore deducted from its gross cost. Thus we arrive at a net cost of $51 billion.
📝 See the calculations in our Basic Income Funding Options Spreadsheet
We acknowledge that a basic income set to 75% of the poverty line is inadequate in ending poverty; it would reduce poverty by 50%. However, we are using the PBO’s basic income costing simply because it is the most authoritative one to date as well as the one most often promoted by advocates in parliament.
There are a lot of thoughtful and well-designed basic income programs out there. The basic income community has rallied around principles that we believe should guide the development and implementation of any eventual basic income. The plan (as designed for the Ontario Basic Income Pilot and costed here) falls short of those aspirations.
However, this basic income is currently the benchmark model for the nation because it has seen real world implementation. When parliamentarians discuss, debate, and inquire about basic income, it is most often in reference to this model, and they have directed the PBO on numerous occasions to cost and explore the impacts of this program in detail. The number one question we now get from politicians and advocates is “but how would you pay for it?” The following is UBI Works’ attempt to answer precisely that.
In choosing the most reliable costing data from the PBO, we have also selected the plan they were asked to cost – the Ontario Basic Income Pilot model. This funding plan can provide MPs and advocates with a starting point for a guaranteed basic income in Canada that addresses key voter objections, so it could plausibly win in an election and, from there, the program could grow until poverty is eradicated. Likewise, this funding proposal could be the basis of how to pay for any number of basic income program designs.
Some limitations of this model:
Adequacy: The model sets the minimum level of income based on 75% of the Low Income Measure and, by the PBO’s calculation, would only cut poverty in half nationally. We believe this to be insufficient.
Individuals vs. couples: The model provides differing levels of support income for individuals and those living in couples. Some advocates point to the importance of having basic income paid to individuals instead, emphasizing the need to empower individual financial autonomy and to avoid economically punishing couples.
Clawback rate: The clawback of earned income is set at 50% to balance cost considerations and reduce the disincentive to work. There is little evidence that this is the optimal number or mechanism. The PBO explores different rates here.
We’ve arrived at a net cost of $51 billion, but research suggests that the true cost of basic income is likely much lower. Our net cost figure does not take into account the whopping $80 billion or more in annual costs of poverty in Canada or the $10 billion or more in potential new tax revenues from hundreds of thousands of jobs created by basic income growing the economy.
The cost of poverty in Canada has been estimated at $73 to $86 billion a year. This includes the increased costs to our healthcare, justice and social services systems, the intergenerational costs of poverty, and the staggering losses to productivity that result from systemic poverty. This estimate by the Ontario Association of Foodbanks was published in 2008. The cost of poverty has very likely increased significantly since then, making $80 billion a conservative estimate.
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While basic income would significantly reduce the cost of poverty in Canada, we didn’t factor this into the net cost because downstream cost savings are difficult for a government to use as a way to directly fund such an investment, without taking on debt. In many cases, these savings are realized at the provincial and municipal levels and therefore not immediately accountable towards a federal program.
Depending on how it is funded, increased economic activity from basic income could generate an estimated $10 billion or more a year in potential new tax revenues, while creating hundreds of thousands of jobs.
Taxes can hamper economic development, but spending those tax dollars effectively can promote it enough so that the net effect is economically stimulative. The tax reforms we propose minimize these hampering effects by targeting areas of unproductive money accumulation in the economy, and in turn, giving that money to households who will spend and invest it.
This produces an economic multiplier effect, where each dollar invested into basic income spurs more than a dollar of economic activity and a resulting increase in tax revenues. We already see this with the Canada Child Benefit, a basic income for families: each $1 invested contributes $2 of economic growth, and 55 cents of that is recouped in taxes from economic activity.
However, it’s hard to come up with a single estimate on potential new tax revenues because the net economic growth depends on exactly how the basic income is financed. Therefore to be conservative, we didn’t include it as an upfront cost offset.
We’ve shown how the true cost of a basic income is likely much lower than $51 billion. Yet, even without factoring in the cost of poverty or economic growth potential of basic income, there is an abundance of funding options that meet our 3 criteria of: i) not costing the majority of Canadians, ii) not negatively impacting private capital investments and economic growth, and iii) working within our tax code or having strong international precedent.
An FTT is a tax on financial transactions that mostly falls on the largest wealth portfolios. It has been successful in raising revenues in major economies around the world.
The UK, France, Italy, and Hong Kong all have a financial transactions tax – a fee or duty placed upon the sale, purchase, transfer, or registration of a financial instrument. This tax would fall predominantly on those who have large financial portfolios, which are disproportionately among the wealthiest Canadians.
In its 2019 estimates for the federal election, the Office of the Parliamentary Budget Officer (PBO) estimated the cost of implementing a 0.5% financial transactions tax in Canada on transactions made in equity, bond, money, derivatives, and foreign exchange markets. An FTT of 0.25% would better align with the rates currently in force in other jurisdictions, including Hong Kong (26 basis points), the UK (50 basis points), Italy (10 basis points) and France (30 basis points).
FTTs have proven to be reliable sources of revenue in several jurisdictions. The UK FTT (called the Stamp Duty Reserve Tax) has been in place since 1986 and raised over $6B CAD in the 2019-2020 fiscal year. Hong Kong has decided to raise its FTT by six basis points to help pay for the economic recovery from the COVID-19 pandemic. This tax has consistently raised 5-9% of its annual government revenues over the past decade, approximately $3-6B CAD in a country of only 7.5 million people.
Source: Vivic Research.
Most financial institutions, including banks and insurance companies, aren’t required to pay GST, giving them an unfair advantage compared to other industries. An FAT, which has been introduced in major countries around the world, addresses this by taxing them more like the rest of the economy.
Québec, France, the United Kingdom, Denmark, and Israel all have a financial activities tax – a tax on total profits and remuneration in the financial sector.
Québec currently imposes a compensatory tax on financial institutions. Wages and salaries paid by banks are subject to a tax of 4.14%, while those paid by other financial institutions are taxed at lower rates. Insurance corporations are not subject to the tax on remuneration, but insurance premiums are taxed at 0.48%. In France, there is a progressive tax on wages and salaries in industries not subject to the Value Added Tax (similar to Canada’s GST), which includes their financial sector. The UK has implemented an 8% FAT on bank profits. FATs were also proposed by the IMF and G20 countries in the wake of the 2008-09 recession and could also have the added benefit of deterring risk-taking by the financial industry. (Vivic Research)
Most financial services are excluded from having to pay the GST, which constitutes an unfair tax preference that has benefited that sector. An FAT would therefore reduce the differential tax treatment between the financial sector and other sectors in our economy, while effectively functioning as a tax on the financial sector’s added value.
This measure proposes a 4% tax on profits and a 3% tax on remuneration (including all wages, salaries, and bonuses) in the financial sector. It is important to tax both profits and remuneration so that large bonuses cannot be shifted to salaries and vice versa. Importantly, this tax would also apply to the remuneration of employees that were not based in Canada.
Source: Vivic Research, Canadians for Tax Fairness, CCPA Alternative Budget 2022.
Large multinational corporations often pay lower taxes on their income than large Canadian corporations do. This addresses that by making those multinationals pay the same tax rate as large Canadian corporations instead.
This measure proposes that the net income of multinational enterprises (MNEs) be taxed in Canada based on the share of the MNE’s global sales that occur in Canada. The proportion of net income that firms allocate to Canada would be taxed at the domestic corporate tax rate.
This policy would primarily affect large multinational enterprises who pay lower effective tax rates in Canada than large Canadian enterprises. In fact, the effective tax rate for large multinational enterprises in Canada is negative, indicating that they receive more money from the Canadian government than they pay in taxes, likely because they are able to shift their profits to tax havens. There is no difference in the effective rates of small MNEs and small Canadian enterprises in Canada.
The proportion of taxable income allocated to Canada would be based on the sales of MNEs, and not their assets or employment. Therefore, the literature suggests that this tax should have a limited impact on employment and investment in Canada, thus protecting jobs for low- and middle-income households. Sales-based formulas are commonly used to allocate profits between US states.
130 countries recently agreed upon a similar proposal under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. This agreement is a first step towards reducing MNEs’ ability to shift taxable income towards low-tax jurisdictions and ensuring fair allocation of taxation rights on digital companies. However, it remains to be seen whether this proposal will be implemented and whether significant proportions of taxable income would be exempt (the proposal currently suggests that only MNEs with a profit margin greater than 10% would be subject to the tax). While international cooperation is desirable, experts have acknowledged that this policy could be implemented unilaterally without affecting investment because sales are much less mobile than profits and intangible assets.
Source: Vivic Research.
Reduces a tax-dodging strategy widely used by corporations.
For many years, the OECD has called for countries to restrict widely-used corporate tax-dodging schemes such as excessive use of corporate interest deductibility, while Canada has lagged in this regard. The federal government could address this by restricting interest deductibility to no more than 20% of corporate earnings income before interest, taxes, depreciation and amortization (EBITDA) for corporations with net interest expenses of more than $150,000.
Source: Canadians for Tax Fairness, PBO.
Large polluters often pay less tax than smaller polluters. This would make them pay the same tax rates instead, making our carbon pricing rules fairer and more effective.
Canada and its provinces currently provide large exemptions and credits to specific sectors and emitters under the Carbon Tax framework. The original intent was to shelter these industries from international competitors not subject to the tax. However, by creating exemptions, we undermine the core principle of emissions reduction and the equal cost of carbon that would drive carbon-reduction innovations. In this highly unequal market, the price of carbon can range from $25.60 to $1.80 per tonne according to the Canadian Institute for Climate Choices with the largest emitters often paying the lowest rates. By letting the most polluting industries play by a different set of rules, the Canadian government is depriving itself of billions of dollars in revenue that could serve the pressing needs of Canadians.
Source: Canadians for Tax Fairness.
Large corporations can deduct executive pay from their income to reduce taxes. This limits that deduction to $1 million per employee. This rule already exists in the US.
Not only has executive and other high-level compensation continued to escalate in Canada, but Canadian corporations can deduct these from their income for tax purposes, unlike in the US, where there’s a $1 million limit per executive. Limiting this tax-deductible expense to $1 million per employee would save the federal government $500 million annually.
Source: Canadians for Tax Fairness.
Introduces a minimum tax on book income for the largest corporations, in line with global calls for a minimum corporate tax.
Many large corporations are able to pay no tax or receive tax refunds even when they report profits to their shareholders. Just as the US Department of the Treasury proposed in 2021 (see pg. 14), Canada should introduce a minimum corporate tax of 15% on book income for large corporations with income of over $1 billion.
Source: Canadians for Tax Fairness.
Many wealthy Canadians make passive income from wealth sitting inside companies, which gives them a major tax advantage over most Canadians. Taxing this passive income would reduce this advantage while encouraging companies to find more productive investments for their money.
This proposal would implement a new 10% non-refundable tax on all passive investment income earned in corporations (i.e., adjusted aggregate investment income). There is a significant tax deferral advantage to retaining income in corporations and reinvesting it rather than paying it out to shareholders. This strategy gives shareholders and business owners a significant tax advantage over other citizens.
The Department of Finance estimated that 83.4% of passive investment income is earned by the top 1% of income earners and 96.3% is earned by the top income decile. Increasing taxes on this income would thus be a highly progressive tax measure that should encourage firms to reinvest more of their profits into growing their business and have little effect on most Canadians.
However, this measure would likely have significant behavioural effects. Passive investing within corporations would be severely discouraged, leading to corporations claiming more profit or reinvesting in their core business – that’s a good thing.
Source: Vivic Research.
Introduces a tax on Canadian businesses that keep assets in tax havens. This could encourage businesses to move some investments back to Canada, further stimulating our economy.
This proposal would implement a 1% withholding tax on the value of assets held by Canadian corporations in recognized tax havens. According to the PBO, this measure would raise $1.7B in revenue. Coupled with taxing MNEs’ income based on their share of sales in Canada, incentives to use tax havens would be significantly reduced.
This tax would largely fall on shareholders of Canadian enterprises that engage in profit shifting to tax havens. Furthermore, this proposal would discourage investment in tax havens by significantly increasing the effective tax rate on income earned in tax havens. Thus, enterprises would be encouraged to shift investment to other jurisdictions, including Canada.
Source: Vivic Research, PBO.
Wealthy people pay half as much in taxes on income made from their existing wealth as you do for the income you get from working. This is called the ‘capital gains exemption’. The most common critique of removing this exemption is that doing so will disincentivize new investment and could therefore hurt the economy. Removing the capital gains exemption for everything except corporate shares preserves the tax advantage for investments that grow the economy like entrepreneurship and new businesses.
The exemption of 50% of capital gains from taxable income is one of the most regressive elements in the Canadian tax system, with an estimated 92% of its benefits accruing to the top decile of income earners. This proposal would eliminate this exemption on all forms of capital gains except for corporate shares (including mutual funds). This would eliminate the exemption on land, natural resources, non-residential structures and residential structures other than principal residences. Implementation of this policy could be relatively straightforward given that individuals and corporations already report their capital gains broken down by source.
The intent behind exempting returns from corporate shares is to preserve incentives for productive investment. While the capital gains exemption was implemented to encourage saving, recent evidence suggests that increasing marginal effective tax rates on capital gains does not reduce reporting of capital gains. In fact, after the abolition of the $100,000 lifetime capital gains exemption in 1994, capital gains realizations actually increased for those Canadians most affected by the policy change. Thus, this policy change may not reduce Canadians’ savings, and the exemption for corporate shares could ensure that it has minimal impact on productive investment.
The Department of Finance estimated that the capital gains exemption cost the federal government $19.7B in 2021. Assuming that returns on shares are equal to returns on other capital assets (including land, natural resources, non-residential structures, and residential structures not including principal residences which remain exempt), an estimated $8.3B in revenue could be raised by this tax proposal.
Source: Vivic Research.
The RRSP/RPP deductions mostly benefit those with the highest incomes who don’t need the help. This proposal slightly reduces the amount saved when high-income filers put money into an RRSP while increasing the money used to help low-income filers contribute to their RRSP. Assets within an RRSP are not affected and continue to grow tax free.
This measure proposes that RRSP and RPP contribution deductions be reformed to a refundable tax credit valued at 15% of the contribution. The current deductions offered through RPPs and RRSPs reduce the amount of taxes paid by filers. In contrast, a refundable tax credit would provide a payment to filers equal to 15% of the the amount of money contributed to the RPP or RRSP in a year.
Contribution deductions are regressive because it helps high-income earners more than low-income earners. For example, a high income earner would save more in taxes from a deduction than a low-income earner, since each dollar has a higher marginal tax rate for the high earner, and therefore would reduce their taxes much more than for the low earner. And for those who pay no taxes, this deduction doesn’t help at all. By contrast, a refundable tax credit helps all those who pay taxes equally. No matter which income tax bracket you are in, this refundable tax credit would reduce the amount of tax payable (or give you a refund, if you pay no taxes) by 15% of contribution.
The proposed change would make RRSPs more progressive by providing more financial incentives to low-income filers to contribute to RRSPs and reduce tax sheltering benefits for the highest income recipients. These reforms would also maintain incentives for taxpayers to save, particularly lower-income Canadians.
Source: Vivic Research.
The Basic Personal Amount reduces taxes for all Canadian taxfilers regardless of their income, even the highest-income Canadians who do not need the help. This proposal eliminates the BPA for only those making more than $152,000 a year, which is approximately the top 3% of tax filers.
This tax reform would gradually increase the inclusion of the basic personal amount, a non-refundable tax credit, from 0% at the bottom of the 4th income tax bracket to 100% at the top of the bracket ($151,978 up to $216,511; 2021 federal tax rates), to be taxed at the lowest rate of 20.5%.
For example, a filer at the bottom of the 4th tax bracket would pay 0 tax on the basic personal amount, while a filer at the top of that tax bracket would pay 20.5% tax on the basic personal amount.
Source: UBI Works.
We’ve shown over $52 billion in feasible funding options – more than enough to meet the net cost of basic income – that do not tax the majority of Canadians or discourage productive investment. We know now that it’s not an issue of whether we can afford basic income, but whether there is the political will to do it.
While a majority of Canadians support basic income, polls show that most would not be willing to pay more taxes to help fund it. Yet most agreed that those who can pay for it – the wealthiest in Canada – should pay for it.
Source: Angus Reid
If we are to garner more political will for basic income, it’s important that we identify funding options which satisfy this key demand from the public: that they do not tax the majority of Canadians. Our funding plan meets this criteria while ensuring the continued economic prosperity of our nation and its people.
We held a special Zoom Launch Event for this article on March 21, 2022 for Basic Income supporters across Canada. You can watch the full recording here, with timestamps:
In another article, we show 8 ways to pay for Recovery UBI, a more comprehensive program that can reduce poverty by 100%.
To shift the conversation about basic income to recognize it as an economic need and economic opportunity, with the goal of seeing UBI implemented in Canada.
We want a Canada where everyone can pursue their potential and not be held back by basic material constraints or unsafe environments.
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