Basic Income, Guaranteed Income and Tax Credits: What’s the Difference?

Modern concerns about poverty and income redistribution often involve proposals for a Basic Income or a Guaranteed Annual Income.  A Basic Income (BI) would provide a specific benefit amount to every citizen which is subject to tax.  It has garnered considerable international support through the Basic Income Earth Network (BIEN).  The Guaranteed Annual Income (GAI) would provide a specific benefit amount to every family without any other sources of taxable income and reduce that benefit according to a specified reduction rate as taxable income rises until income is sufficiently high that the benefit disappears.  A GAI was proposed by the Senate Committee on Poverty in 1971 and by the Macdonald Royal Commission in 1985 and was tested in the Manitoba Basic Annual Income Experiment during the 1970s.

Are The BI and GAI Really Different?  The Basic Income can be considered as a special case of the Guaranteed Annual Income in which the specified benefit reduction rate is zero.  Consider a benefit amount of $10,000.  Under a BI, persons without taxable income and persons with an income of $10,000 would each receive the BI benefit amount of $10,000, which would be taxable.  Under a GAI with a specified reduction rate of 20%, single persons without taxable income would still receive $10,000 while persons with taxable income of $10,000 would receive a reduced GAI benefit of $8,000.  The other important difference is that a BI is a benefit paid to individuals regardless of family arrangements, whereas a GAI benefit is paid to the family unit and recognizes that living costs per person decrease with each additional family member.  The GAI is more consistent with existing measures of low income, such as Statistic Canada’s Low Income Cutoffs and the Market Basket Measure.  The positive benefit reduction rate used by a GAI also targets benefits to lower-income families, which can more directly reduce the measured incidence and depth of poverty for an economy.

Do we see practical examples of the BI and GAI today?  Advocates of a Basic Income or Guaranteed Annual Income might say no, because they envisage a universal plan that would supplement or replace existing income support programs at the federal and provincial levels.  Many modern tax benefit programs, however, can be better understood as modest and restricted examples of a BI or GAI plan.  One current and politically controversial example is Canada’s child benefit programs, which have evolved as a Universal Child Care Benefit and a refundable Canada Child Tax Benefit.  The Universal Child Care Benefit (UCCB) introduced by the federal Conservative government corresponds to a BI amount based on the number and ages of children.  The UCCB is provided regardless of family income and is reduced for higher-income families only in the sense that it is taxable (for two-parent families).  The Canada Child Tax Benefit (CCTB) corresponds more closely to the principle of a GAI, since the benefit amount per child is reduced for families with higher net income, although the current modest reduction rate (2% for families with one child and 4% for larger families) means that most families receive some portion of the CCTB and it is not directed primarily at low-income families in its current design.  The federal Liberal party proposes an expanded Child Tax Benefit that would replace the existing benefit programs and provide more income support for lower-income families.

Indeed, many other modern federal programs correspond to the precepts of a GAI, including the Goods and Services Tax Credit, the Working Income Tax Credit, and the Guaranteed Income Supplement for seniors, not to mention the clawback or benefit reduction features of such programs as Old Age Security and Employment Insurance that mimic a GAI design at the level of the individual taxpayer rather than the family.  The reason for the design of these programs along the lines of a GAI is not hard to discern: As income support programs, they can deliver more benefits to those most in need at lower cost by reducing benefits for those with higher taxable incomes.

Moreover, the design of current federal tax credits along the lines of a GAI can be extended further within the current tax system. There are at present more than $80 billion of nonrefundable tax credits—including the basic personal amount, Canada Pension Plan and Employment Insurance contributions. There is also a vast range of tax credits based on age, pension income, marital status, children, employment income, education, caregiving, disability, and medical expenses. These credits are currently nonrefundable, which means that they can only be claimed against taxes owed and provide little or no benefit to the lowest income families.  Harvey Stevens and I have calculated that feasible plans to make these tax credits refundable, so that benefits would be provided in proportion to the difference between taxes owing and total tax credits for the family along the lines of a GAI, could provide substantial income support directed primarily to Canada’s poorest families for a moderate cost in the range of $5 billion to $7 billion.  This would be a modest but important step toward a universal federal Guaranteed Annual Income in Canada, since refundable tax credits correspond to a GAI design.  Since many provincial tax credits are based on their federal counterparts, the provinces would have the option of making their credit refundable as well, further increasing the generosity of these benefits for lower income Canadian families and improving the redistributive impact of Canada’s tax system.

Wayne Simpson

Professor of Economics, University of Manitoba

Research Fellow, University of Calgary School of Public Policy

http://home.cc.umanitoba.ca/~simpson/