Potential socioeconomic effects of implementing the universal basic income plan

We have estimated that we would need to implement a federal income tax rate of 42.6 — 46.9% to support a UBI of $16 500 per year. In practice, the federal government would need to implement such a plan in real life and see how their budget is affected as a result. The tax rate and UBI would then be adjusted annually until an equilibrium is reached whereby public benefit is maximized and tax burden minimized. However, the UBI amount and tax rate we calculated here could serve as a starting point towards implementing such a plan.

Now let’s go back to the original question posed in the title of this article: What would a universal basic income look like in Canada? We have an idea of what the numbers might look like and the direct impact this would have on the after-tax income of Canadians, but what indirect effects might we see?

How would the unemployment rate be affected?

A common argument from critics of a UBI is that it would disincentivize work. However, a possible outcome of implementing this UBI plan could be a decrease in full-time work, with an increase in part-time work whereby the overall number of Canadians working increases. Consider a business that requires 400 work hours per week from its staff. They could currently hire 10 full-time workers at 40 hours a week. They could also hire 8 full-time workers and 4 part-time workers at 20 hours a week for a total of 12 employees. This could allow for someone to supplement their UBI with stable part-time work, while also engaging in work which may have a less stable stream of income, such as contract work or artistic projects. Whereby previously Canadians would need to rely on a full-time income to maintain a decent standard of living, more part-time jobs would allow more Canadians to be employed and supplement their UBI.

Would provinces follow suit?

So far, we have only discussed making changes to federal income tax policies. Provinces may see the benefits of such a program and could adjust their tax rates accordingly. Provinces would likely have to administer much less in the form of welfare, therefore reducing provincial government spending. In turn, they may feel it is appropriate to reduce taxes as a result, this may offset some of the additional tax burden placed on higher-income earners. The provinces might also take this opportunity to lower provincial debt or invest in public infrastructure which could in itself create more jobs. Conversely, provinces may want to implement their own system and have a top-up to the federal government’s UBI to account for differences in the cost of living in different provinces. From Table 1, we can see that Ontario and British Columbia have considerably higher rent in their major cities compared to the rest of Canada, therefore these provinces may consider it beneficial to implement a provincial UBI on top of the federal government’s so that their residents can maintain a decent standard of living.

Could a UBI help normalize housing prices across Canada?

If we look back at how we defined our UBI, we considered that 4 people living off their UBI could share a 2-bedroom apartment that costs $1749 per month. However, if you live in Vancouver or Toronto, then you’re looking at paying $2800 or $2926 per month on average, respectively, for a 2-bedroom apartment (Table 1). If your UBI is your only source of income, then you wouldn’t be tied to a job. If you don’t have any other reason to stay in a particular city, you might begin asking yourself if it may be worth moving to a more affordable city like Calgary or Montreal, where you could rent a 2-bedroom apartment for $1448 or $1832 per month on average, respectively (Table 1).

If no action is taken by municipal or provincial governments, we could see some internal movement within the country among unemployed and low-income Canadians. A UBI would give Canadians more financial freedom and they would be able to relocate within Canada more easily without the financial stress that can usually be associated with such a move. This could cause a net migration from expensive cities to more affordable cities. This could also have a normalizing effect on housing prices and rent, i.e. less demand for housing in expensive cities would cause a decrease in rent, while higher demand in more affordable cities could lead to an increase in rent. This internal migration could reduce the disparity of housing costs between cities until a new equilibrium is reached. In turn, as mentioned in the previous section, provinces may want to implement their own UBI, on top of the federal government’s plan, to account for differences in the cost of living between provinces and to reduce net migration from their province to the rest of Canada. Similarly, businesses in expensive cities may need to increase wages if there is a sudden drop in available workers. All these changes could potentially help normalize the gap between average wages and cost of living throughout Canada.

Would we still need a Registered Retirement Savings Plan (RRSP)?

The concept behind an RRSP is that you can make tax-deductible contributions while you’re earning a high income so that you can avoid paying, at least partially, taxes that would be incurred at a higher tax bracket. Then when you retire, you would presumably have a lower income than at the peak of your career and you would then withdraw money from your RRSP which would now be taxed in a lower tax bracket, in addition to making tax-free capital gains on any investments inside the account. However, when we look at our UBI tax plan, we see that every dollar earned, other than the UBI itself, is taxed at the same rate. Therefore, any income that you would contribute to your RRSP would get taxed at the same rate when you withdraw it (assuming the federal government hasn’t changed the tax rate since you made your RRSP contribution). Therefore, the federal government might decide to phase out the RRSP program in exchange for an increased contribution room in the Tax-Free Savings Account (TFSA) program.

Would a UBI help reduce the spread of the coronavirus?

During the ongoing coronavirus pandemic, many nations around the world, including Canada, have implemented measures to limit any non-essential movement of people within or across their borders. The economic effects of these actions are already being felt around the world. There is no doubt that this can severely affect those who receive income from jobs involving interactions with large groups of people such as: restaurants, bars, theatres, sports events, etc. A UBI could have made it easier for workers in these sectors to stay at home, without risking great financial stress. In turn, workers may have started staying at home earlier or have decided to work fewer hours, if they knew they would still have a stable stream of income to tide them over for the coming weeks. This earlier response could then reduce the overall number of cases of COVID-19 that Canada will eventually see by the end of the pandemic.