Constitutional Issues for Basic Income

Terrance Hunsley
Terrance Hunsley

Support for a national basic income program has been growing, to the point that the idea is no longer scoffed at in government circles. 

Several different versions have been discussed, which has confused the matter a bit, but the focus seems to be converging on an option which is not a universal payment to all, but a basic, unconditional minimum income to eliminate poverty and subsidize modest incomes. It could bear some resemblance to the current OAS/GIS program for seniors. The idea of extending the GIS income guarantee downward through the adult age range has been advanced by former senator Hugh Segal. Before he was a senator, he was Brian Mulroney’s chief of staff, and Mr Mulroney recently, in a webinar sponsored by The Pearson Centre, endorsed that approach for a basic income.

The Basic Income Canada Network (BICN) recommends a slightly more generous plan that guarantees all adults a minimum income of about $2000 per month. Any money received beyond that amount would be taxed at 40% until the subsidy disappears. It would pretty much eliminate poverty and provide a declining income supplement for people in the bottom 60% of the income scale. 

They suggest it be paid for in part by eliminating provincial social assistance payments as well as several tax credits. The other, larger, part would be paid through an increase in taxes on the top 30% of earners, of about 5-8% of their income.  BICN suggests that the ongoing costs would be tempered by increased economic growth as a result of the extra consumption it would generate, and also by increased health, mental health, and economic participation of formerly dependent poor people.

Both options make sense. But were the government to decide to implement one of them, there are constitutional issues that would have to be worked out. 

Constitutional Division of Powers

The British North America Act, succeeded by the Constitution Act,  delegates most of the authority over social programs to the provinces, specifically for education, for property and civil rights, hospitals, and for matters considered local or charitable.  So health and education are clearly specified provincial responsibilities. And despite the fact that the federal government spends far more than the provinces on income security and income redistribution,  the authority over social services, workers compensation, social assistance and other income-related subsidies, is understood to be provincial. Indeed, most instances of federal involvement in education, health and social services have required advance provincial agreement. 

How it evolved:

National unemployment insurance came in 1940 when provinces ceded legislative room to the federal government. The same with Old Age Pensions in 1951, and 1964 for supplementary benefits. In these cases the provinces voluntarily gave over their authority. 

Other programs involved federal sharing of provincial costs, such as hospital insurance in 1957, medical services in 1966, and social assistance and social services (Canada Assistance Plan) in 1966.  The Canada  Pension Plan came as a joint federal-provincial program in 1967. That period of expansion of national social programs came under Lester Pearson’s minority government, and has been dubbed an era of “cooperative federalism”. The Canada Assistance Plan required provinces to measure – and meet – the basic needs of individuals and families. The concept of the “needs test” had derived from Canadian involvement in the Universal Declaration of Human Rights, (ratified by the federal government and all of the provinces) and the component rights to life, liberty and social security (among others).

The system seems to have evolved harmoniously until about the mid-seventies, when the federal government became concerned that open -ended cost-sharing meant they could not control their spending. They also fretted that they did not gain as much political recognition for their contribution as did the provinces. 

When the oil producers of the world formed a cartel and started inflating energy costs, Canada was enmeshed in a period of stagflation. The feds began a process of turning open-ended cost-sharing arrangements into closed-ended financial contributions. The contributions were made as a combination of cash payments and a one-time transfer of “tax points” (an agreement that federal income taxes would be reduced simultaneously with a corresponding increase of provincial taxes). 

Consequently, as the value of the tax points increased each year, the pre-set cash contributions declined in relative value. So also did federal influence over provincial programs. When the Chretien government in the 90’s made drastic cuts to the Social Transfer, those cuts were passed on by provinces to social assistance recipients, thus abandoning any test of basic need, and the Declaration of Human Rights. 

The Canada student loan program began in 1939 on a shared cost (matching grant) basis, and became self-standing in 1964. (Most provinces also have programs which may or may not be coordinated.) 

The Family Allowance Act was passed in 1944 as a unilateral federal measure, and introduced a universal payment for families with children. It was the only proposal implemented from the Marsh report of 1943, which is credited for proposing the combination of programs that now, in essence, make up the Canadian welfare state. MacKenzie King may have chosen it because the federal government was able to do so on its own, based on its spending power,  citing a national concern to encourage and support families with children. Years later the transfer was made taxable, which soothed some of those who complained about giving money to people who weren’t poor, and also reduced the net cost. 

Pretty much all of the other Marsh report proposals required federal-provincial agreement, and were not fully realized until twenty-five years later.

What are some federal options now?

If a basic income is seen as an antipoverty measure, it involves a legislative area where provinces have clear authority.  And it is by no means clear that they would cede that area of power to the federal level. Power is power after all.

Nor is political consensus likely to happen quickly on a proposition as bold as a national basic income. There was a fleeting moment a few years ago when the Trudeau government was first elected, when most of the country was governed by Liberal or NDP governments. Consensus on a basic income might have been possible, but the Ontario government decided to instigate a pilot project on basic income rather than seek a national deal. That kicked the problem down the road and, predictably, sealed its fate when governments changed. So political stripes will come into play pretty quickly.  The high income people who would feel most of the tax burden of a basic income are not uniformly distributed across the country, so the provinces where they are most prevalent would have some second thoughts from that perspective too. 

The feds do have strong bargaining chips

They have spending power. They have superior taxing power, and they have the ability to, in essence, print money. (Think of quantitative easing). They are already passing a lot of cash to the provinces through the health and social transfers, bilateral agreements such as the labour force development agreements and infrastructure investments, and through control of equalization disbursements. They could propose a trade-off, where they take responsibility for all income security, reducing their involvement in health and education, for instance.

Still, history tells us that the time frame could be too long for the Trudeau government to think of actual implementation, or for Justin Trudeau to create his legacy. This approach would be more likely to work over time, beginning with a few willing provinces and permitting others to opt in when and if they wish.  

But what if the federal government decided not to seek consensus, but to try to implement a basic income under its own constitutional heads of power?  

The design and rationale would be important.

They would probably have to define a national need which would withstand scrutiny. If it were to be a national antipoverty program, it would encounter provincial resistance.

If they did it as a response to the national COVID emergency, that could work for awhile. 

They could try passing it as a taxation measure with associated redistribution. An earlier proposal for a modest basic income was put forward by economist Robin Boadway, and it involved transforming the income tax personal exemption into a refundable credit, so that everyone would receive the same benefit. (Like a kind of reverse taxation, people with little or no taxable income would receive the value as a cash payment.) But that benefit is quite small, between two and three thousand dollars, counting federal and provincial tax reductions. 

There are many other income redistribution mechanisms in the tax system. Since the 1980’s. Canada has been a leader in the use of tax credits, both refundable and nonrefundable. They are used to offset disadvantage, such as disabilities, to assist with costs of raising children (Canada needs children), to assist the elderly, and to encourage certain forms of consumer activity, such as public transit or energy efficiency.  

A weakness of this approach is the clear anti-poverty goal, where the provinces hold sway. 

So Mr Trudeau could take another approach. He could say that Canada needs to stabilize incomes and consumption to weather the storms of COVID and of the simultaneous transformation of the world of work which is taking place. He could introduce a universal taxable basic income for that purpose. Everyone would receive the same amount, and pay normal income tax on it. Provincial social assistance programs would be left in place. The regulations in every province would immediately recognize those transfers as income, and would reduce, and probably eliminate, social assistance payments to recipients. But they would retain the capacity to maintain and even improve, a variety of special benefits that they sparingly give out now. Things like child care subsidies, disability supplements, special purpose housing subsidies, personal support services, etc.

That could work, although opposition politicians and vested business interests would become apoplectic in their discussion of the huge dollar figure that would be called “cost”. (The net cost would be far lower than the gross cost, especially if they were to simultaneously increase marginal tax rates on the upper third of the income scale.) It would take political courage, for sure. 

There would be a couple of sticky areas for policy makers to think about. The first would be the age category that typically covers post secondary students (say 18 to 25). The choice could be made to replace student loans with a basic income. But the thought of combining a couple of thousand dollars a month with a multi-year sojourn around the world and a few online courses is pretty tempting, and could even be personally and culturally enriching. But a drag on the Canadian economy occurs when a student takes extra years to complete a particular level of study .. say, six years for a bachelor’s degree for example. Each extra year deprives the economy of a productive worker, extra consumption, and tax revenues.  Moreover, although people do complain about their student debt, it is a good reminder that your country has made a substantial investment in you. There is an intergenerational bond there, and a requirement to give back.  Moreover,  the government does have ways to forgive debt and could do more, especially after a few years of paying taxes.

The second area, and not entirely unrelated, is the temptation for people to take the benefit and work under the table. I am not concerned that people would simply refuse to work, but the emerging economy does provide opportunity to combine various kinds of work and other activity, in various places in the world. The OECD has already signalled to its member countries that collecting income taxes could become more and more difficult in future. So the government might have to implement strong measures of compliance for reporting income from any source. But they will probably have to do that in any case.

And finally, what if Mr Trudeau were to decide to put some water in his wine, and take a less politically risky course?  He could pick off a piece of the puzzle, and use the Canada Workers Benefit to implement a guaranteed living income for workers. Every low income worker would receive a subsidy, paid monthly, to bring their income to a level that would support independent living in their community. That could mean that a low income worker would have an income at least equal to 3/4 of the median wage in their economic region. This might be looked on as a kind of portable wage subsidy that the worker could take with him or her to the employer of their choice. It would help to support industries threatened by COVID, while also encouraging workers to choose employers that offer a better future. 

If he wanted to be a bit more universalist, he could combine that with the Boadway formula mentioned above, and create a small basic income for everyone through making the personal exemption refundable. He could then use some moral and political suasion to convince provinces not to claw that back from people on social assistance. 

Choices, choices….  

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