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$20,000 to the poor: Let's see the details first

Peter Power/Peter Power/The Globe and Mail

Kevin Milligan is Associate Professor of Economics at the University of British Columbia

Saturday's Globe and Mail article on the Guaranteed Annual Income (GAI) idea by Erin Anderssen attracted a lot of attention -- there are now more than 1400 reader comments on her story. I also wrote on the GAI a few weeks ago in Economy Lab, so I had some reactions when reading the comments to Erin's thought-provoking article.

First, many respondents seem overtly hostile to the idea of making $20,000 transfers to lower income Canadians. The fact is however, that we're not far off that level of transfers now.

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Social Assistance rates in B.C for a single parent with two kids are around $1,035 per month. On top of that, such a family would receive numerous refundable tax credits, such as the HST credit, the Canada Child Tax Benefit, and others. When you add those benefits to the in-kind transfers of services, you are not far away from $20,000. The main motivation for the GAI for many people (such as Senator Hugh Segal) is to repackage these already-existing benefits in a simpler, more transparent, and more effective way.

Second, implementing a GAI as conceived by advocates would likely be very expensive. The broad concept may sound great -- a large base transfer combined with low phase-out rates of the transfer as income rises.

The problem that arises is the expense of such a scheme. If the phase-out rate is low, then the transfer will spread far up the income distribution. This means that not just the single parent mentioned above receives benefits, but also many people with jobs and higher income. That structure for transfers may be desirable, but it is very expensive.

Moreover, as Laval economists Nicholas-James Clavet, Jean-Yves Duclos and Guy Lacroix have pointed out, the expense of such schemes multiplies if people begin adjusting their job and work decisions to account for the new transfer--many people may work less. On the other hand, if you try to fix the cost problem by increasing the phase-out rate so that fewer people receive benefits, then much of the efficiency gain from a GAI would evaporate.

If GAI advocates want to push the debate forward, they need to get serious about the structure. What phase-out rate would a Canadian GAI have? What base transfer? How would it be integrated with the plethora of existing federal and provincial transfers? What would it cost? Until we see those details worked out in a serious proposal, I worry that the GAI resembles the 'non-fat' yoghurt from Seinfeld -- it's too good to be true.

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About the Author

Kevin Milligan is Associate Professor of Economics at the University of British Columbia. He is also a Research Fellow with the C.D. Howe Institute and a Research Associate of the National Bureau of Economic Research. More

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