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December 14, 2021 | Blog

Canada Workers Benefit - From Negative Income Tax Measure to Possible Forerunner of Universal Basic Income?

With the introduction of the COVID-19 benefits such as the CRB and CERB, the concept of minimum income has entered popular discussion. What’s not necessarily known is that in Canada, we already have a program in place similar in nature, the Canada Workers Benefit (CWB). What are the similarities? And what effect do programs like the negative income tax and universal basic income have?

From tax expert Gerry Vittoratos

Origins of the Canada Workers Benefit

The Canada Workers Benefit (CWB) was first introduced in the 2007 federal budget as the Working Income Tax Benefit (WITB).  Its stated aim was to mitigate the effect of losses to income supports for low-income Canadians because of increased employment income. It creates a big disincentive for individuals on income supports such as welfare to re-enter the job market. This disincentive is commonly referred to as the “welfare wall” .

Conceptually, the CWB is what is known in economic circles as a negative income tax (NIT). The premise is simple: give a subsidy, through a refundable tax credit, to low-income individuals with working income below a certain income threshold, to compensate for the loss of income supports such as welfare. The computation usually involves giving people a percentage of the difference between their income and an income cut-off, or the level at which they start paying income tax. This way, the standard of living of these individuals does not decrease with the introduction of employment income. In theory, credits like the CWB would remove the welfare wall disincentive.

Similar Concept to Universal Basic Income… but Different

Universal basic income (UBI) in turn is a subsidy that is paid directly to individuals instead of a tax credit. The purpose of the payment is to provide an income floor to cover the basic cost of living and a sense of financial security. No conditions are set for universal basic income; every citizen would get a minimum amount of income no strings attached.

Superficially, we see that the main goal of both programs is the same: provide a minimum level of income for the targeted individuals. Simply put, a basic income guarantee. However, there are important distinctions between them. The main difference is, of course, in the delivery of the subsidy; for the negative income tax it’s through a tax credit, while for universal basic income it’s paid directly. The other major distinction is the lack of conditions for eligibility to receive universal basic income, while the negative income tax would require conditions such as working income.

Based on the differences above, would the subsidy amount under both programs be substantially different? If structured properly, both programs can deliver the same amount subsidy . The only question then for policy makers is which one is best to achieve the desired results. During the 2016 UBI pilot project in Ontario, it was suggested that the NIT would be the more suitable approach for delivery of this subsidy.

Efficacy of Negative Income Tax and Universal Basic Income

When it comes to CWB, the results of the efficacy of the program are negligible in terms of getting Canadians out of what the government considers as low-income rate. Therefore, it is evident that a negative income tax measure like the CWB is not well suited to alleviate poverty.

What about the effect negative income tax and universal basic income on the welfare wall? Believe it or not, a hybrid between NIT and UBI was tried in Canada in the mid-1970s to positive effect. The program, called “Minincome”, combined characteristics of both NIT and UBI: the amount received was a top up to reach a threshold (NIT). However, the amount of the subsidy was paid directly to the individual (UBI). The results were positive as far as breaking the welfare wall, where 14% of single parents were more likely to work and work more hours than single parents not receiving the subsidy. However, The CWB has not made many inroads in breaking the welfare wall since its inception, with only 10% of welfare recipients having employment income as well. Also, other experiments with NIT and UBI in the US have produced negligible results.

The Pandemic Benefits and the Universal Basic Income Question

As mentioned earlier, the introduction of the COVID-19 benefits such as the CRB and CERB has brought the spotlight back to programs such as NIT and UBI due to the similarity of approaches. What has been the effect on the job market? Are they a disincentive to work?

We have seen a sharp increase in labour shortages during the pandemic, which was to be expected.  However, even with the relaxing of pandemic measures, this labour shortage has persisted for certain sectors of the economy that require a physical presence, such as food services, accommodation and manufacturing. Although no study has been performed yet to find a direct causality, many business leaders feel that programs such as the CERB and the CRB are directly linked to this labour shortage .

There’s growing pressure facing policymakers on multiple fronts: from recipients of the benefits who feel this can be the entryway to UBI, and business owners who feel these benefits are big disincentives to work. Will the federal government go ahead with a UBI considering the framework left in place by the pandemic programs? For now, the federal government seems to prefer the NIT approach of the CWB, as evidenced by the enhancements announced in the 2021 budget, and the sunsetting of many pandemic-specific programs. Only time will tell if these enhancements have a profound effect on the welfare wall.

Hopefully, thorough studies will be performed on the effect of pandemic specific programs and the labour shortage currently observed. This is an unprecedented opportunity to answer some fundamental questions on the effectiveness of UBI programs.

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