Reconciling Crisis Basic Income and Wage Subsides in a COVID-19 World

by Ken Boessenkool

Editor’s Note: This article appeared previously on LinkedIn and is posted here with author’s permission.

Introduction

The current COVID-19 health and economic challenges are unprecedented. The pause being imposed on the Canadian and global economy will large short term costs and likely impose numerous long term challenges as well. Two fifths of Canadians already have lost, and another fifth expect to lose, work and income due to COVID-19. A million Canadians have applied for Employment Insurance between March 16 and March 22.

The challenges facing governments are also unprecedented. They need to face and deal with the massive short term economic dislocations of hitting pause while also keeping their eyes on the medium term challenge of hitting play.

A Crisis Basic Income – the immediate payment of $2,000 to all Canadians who filed an income tax form last year, which is then clawed back on next year’s tax form – should be a critical piece of the short term government response to the COVID-19 crisis.

The federal government’s response to date can be put into four buckets. First, targeted cash to families and the poor through the Canada Child Benefit (CCB) and Goods and Services Tax Credit (GSTC). Second, programs for those who lose their jobs including loosening of Employment Insurance (EI) requirements and the creation of a new application-based Canada Emergency Response Benefit. Third, support for employers through a Temporary Wage Subsidy via relief of payroll remittances. Fourth, deferring income tax owning. I am ignoring a number of targeted programs to aboriginals, domestic violence, homelessness, and students.

I focus on the federal government because while many of the arguments and principles could work at the provincial level, at the end of the day the federal government in Canada administers the tax system and is responsible for employment insurance. The federal government also has the fiscal capacity for the size of expenditure I am envisioning that a number of provinces simply do not.

Evaluating the Federal Approach

How does the federal approach stack up against the Crisis Basic Income Approach? Let’s take each component in turn.

Low Income and Families: CCB and GSTC

A Crisis Basic Income should be more generous to those with lower incomes and to families with children. This could be done ex post by clawing back payments in next year’s tax system based on income (to capture low income) and by family size (to capture children). Or it could be done ex ante by using existing payment systems to deliver cash up front – which is precisely what the CCB and GSTC approach by the federal government is doing.

The government has said that payments under both programs will flow in May. If that is due to administrative and design constraints, then it is what it is. But if there is a way to deliver these amounts in April, that would be preferable. For example perhaps the system can just be “tricked” into sending out every April CCB payment twice, rather than having the system calculate a new payment amount for a schedule payment.

In the case of the GSTC, it is paid out four times a year, so earlier payment may not be available.

In short, the CCB and GSTC payments in the governments plan are consistent with the Crisis Basic Income approach as an ex ante reconciliation. These should be maintained and accelerated if possible.

Unemployed: EI and Emergency Care Benefit

The government’s changes to sickness benefits are modest and should be retained.

It is the CERB where the overlap with the Crisis Basic Income comes to a head. The CERB combines what the government had initially proposed as two programs – one for those who are quarantined, taking care of someone who is quarantined and parents without childcare and a second for the 45 percent of unemployed Canadians who do not qualify for Employment insurance benefits. This evolution suggests that the government is moving towards a Crisis Basic Income approach in at a number of ways.

First, the move to fewer programs rather than more programs reflects the simplicity of the Crisis Basic Income approach.

Second, the wide net cast by the CERB moves it in the direction of the broad-based Crisis Basic Income approach with subsequent true-ups with existing programs. For example it wasn’t clear before combination into the CERB whether applicants could only received benefits from EI OR a crisis program. Now the CERB makes it clear that applicants who receive CERB benefits can have those benefits later reconciled with EI. The recipient net for the CERB is cast fairly wide – in particular to capture the 45 percent of Canada’s unemployed that do not qualify for EI. The inclusion of workers who are still employed but not receiving full wages is also promising – and is a potential release valve for those calling for employer-based wage subsidies. I’ll return to this point below.

Third, unconditional benefits is consistent with a Crisis Basic Income approach. In particular giving Canadians who qualify for EI access to the CERB is good because some of the EI benefit requirements will be moot during the social isolation phase of this crisis.

Finally, the amount is in line with what I have been recommending for a Crisis Basic Income – $2,000 per recipient.

There are also some ways in which a Crisis Basic Income would be superior to the CERB.

First, a Crisis Basic Income would cast a wider net by including all Canadians who filed an income tax form last year. The use of the income tax system by the CERB suggests that the government intends to cross reference the tax system when paying benefits. So why not use the same system, assume all taxpayers have applied and use a “reply all” approach to send benefits to all those who filed an income tax form.

Governments facing the current crisis simply do not know how deep and wide the current economic dislocation will be as a result of the COVID-19 economic pause. It cannot forecast with accuracy which particular groups of Canadians will face an immediate economic loss. It only knows that this will be large. In a COVID-19 world, Canada therefore needs a policy that, by design, overshoots – a policy that is as universal as possible. A Crisis Basic Income will do that. We can reconcile who needs it later.

Based on the CERB announcement that it will pay benefits within 10 days, it is reasonable to assume a “reply all” approach could generate data files and direct deposit quickly, though sending cheques would be a serious complication. I would therefore investigate the ability of the government to spend the next few weeks solicit banking information from as many Canadian tax filers as possible, even if it means delaying payment for a few days. Increasing the number of direct deposits by a significant amount would trump any short delay.

And for those Canadians who did not file an income tax form, the government could provide a portal as they are proposing for the CERB. Take-up rates for this would be no better and no worse than the CERB approach. (I acknowledge Dr. Jennifer Robson’s excellent critique of the “send a cheque” approach.)

Second, the CERB remains an application-based program. And even though a vast majority of these will almost certainly be processed entirely electronically, the application process is almost certain to create challenges of implementation and frustration. And if our lock-down requirements get any worse, finding bodies to process these applications seems a risk not worth taking.

This is particularly the case as the EI program should continue to function – and we already have a million application with only about fifteen percent of those processed as of March 22. Having another application-based program alongside EI seems risky.

A broader-based, automatic payment CERB would align with the Crisis Basic Income approach. And this approach has another benefit – its ability to be reconciled to a broad based wage subsidy being demanded by the Canadian business community.

Employers: Temporary Wage subsidy

Robson and Bishop have joined a growing corus arguing in favour of a larger wage subsidy paid to business. I believe there is a substantial operational challenge to a large, generous wage subsidy. It is one thing to ask employers to reduce their remittances to government for on behalf of their employees, it is quite another to reverse that system as a way to provide wage subsidies to firms.

Thankfully a Crisis Basic Income approach can be reconciled with the generous wage subsidy approach. The key is that the Crisis Basic Income goes to all Canadians who filed an income tax form – that would capture the vast majority of wage earners in Canada. If all employees received a Crisis Basic Income Cheque from the government, employers could negotiate with their employees to reduce wages for some or a portion of the Crisis Basic Income amount for their employees – that is, employees they have not laid off. And this would keep these individuals whole – or more than whole if the firm reduces wages by less than $2,000 per employee. For these firms, the Crisis Basic Income would become an indirect wage subsidy for employers.

Using the Crisis Basic Income as an indirect wage subsidy means that it should probably be treated as taxable income and not as a benefit to be clawed back as I have argued here. In essence, for those who retain their employment, this would mean replacing some of their employment income from the firm with Crisis Basic Income income from the government.

The key to making this work is to make the payment universal – giving employers a largest possible pool from which to save on wage costs – rather than targeted per the CERB approach.

The Crisis Basic Income approach can be reconciled, indeed is economically consistent with, the large Wage Subsidy approach in a way that the CERB approach is not.

And that may be what tips the scale.

Taxpayers: Tax Deferral

The tax deferral merely helps Canadians with a timing issue. The net cost to the federal government is modest, and the benefit to some Canadians will be substantial. It should be kept.

Conclusion

In its latest announcement the government has moved toward the Crisis Basic Income approach. The benefits it is paying out under the CCB and GSTC are consistent with the Crisis Basic Income approach, albeit ex ante reconciliation rather than ex post.

The government’s CERB also moves in the direction of the Crisis Basic Income approach, but is inferior in two critical ways. It targets too narrow a population and it is an application-based program rather than automatic.

Implementing a Crisis Basic Income rather than the CERB also has the potential to address the demands of an increasing amount of business – that the government provide large wage subsidies for employees. By making the payment universal, the Crisis Basic Income can function as an indirect wage subsidy, allowing employers to negotiate with their employees to reduce their wage costs. This would allow employers to retain their employees at a reduced cost without employees facing a loss of income.

And that is a win-win-win for Canadians, its government and its businesses.


Ken Boessenkool is an economist who has done a few things in politics.

The Crisis Basic Income approach has benefitted from numerous @twitter and personal exchanges in the past two weeks, in particular with Dr. Kevin Milligan, Dr. Tammy Schirle, Dr. Jennifer Robson, Dr. Lindsay Tedds, Dr. Mike Moffat, Dr. Rob Gillizeau, Dr. Ben Eisen, Dr. Miles Corrak and a number of policy/political wonks in particular Stephen Carter, Jamie Carrol, Alex Usher, Scott Reid (the non-elected one), Max Fawcett and Rick Anderson. None are implicated for what appears here.

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