What’s the right policy tool to fight poverty?

On Ontario’s plan to hike its minimum wage, and other ideas

by Kevin Milligan

Ontario’s plan to hike its minimum wage has brought new attention to strategies designed to alleviate economic distress. The focus on those who struggle to afford the basics is understandable. Economic growth is not widely felt across the income distribution — those at the top do much better than those in the middle or the bottom. It is not clear, however, that raising minimum wages is a particularly effective way to fight poverty.

For starters, it’s very poor at targeting those in need. (Stephen Gordon has covered this ground here and here.) There are certainly minimum wage earners who live in families that are short of income. But most don’t. If we’re trying to solve low income, we shouldn’t make the task harder than it needs to be.

In short: Focus on incomes, not hourly wages.

Basic Income’ is one approach that targets incomes instead of wages. It would replace some (or all) existing income-transfer programs with a simple transfer payment. Advocates envision this payment would be at least as high as current benefits (including such payments as social assistance and child tax benefits), but would not end if one started to earn income. Instead, the basic income would be reduced at a gentle rate (perhaps 25 cents per dollar earned) until hitting zero when earnings hit a sufficiently high level. The phase-out ensures the tax rate on more work is not too high; an attempt to dismantle the so-called welfare wall of high tax rates that may impede work.

The approach is geared to incomes, which is a large improvement over using minimum wage to fight poverty. The flip-side of the phase-out is that benefits would be received by those well up the income distribution. If the base transfer were $15,000 with a phase-out rate of 25 per cent, for example, someone earning $59,000 would still receive a small payment. A large proportion of the funds under a Basic Income would top up middle-income families.

The consequence of directing so many transfer dollars to middle-income families is the bloated pricetag. I’m not talking about a couple of billion dollars we might find under the fiscal couch cushions. We’re talking in the range of $100 billion per year for any scheme that involves a high transfer and low phase-out rate. (I’ve made some rough calculations here; similar numbers from the Canadian Centre for Policy Alternatives are here.) To be credible, advocates of Basic Income schemes need to start talking about the taxes they would raise to pay for their plans.

As I see it, in order to fund a large-scale Basic Income, middle earners would have to pay a lot more tax. (Couldn’t we just tax those with top incomes? No—this would be very difficult.) Using the handy tax revenue sheet provided by the Parliamentary Budget Officer, we can calculate that raising $100 billion would require almost quadrupling the GST to 20.6 per cent. Most of those newly raised funds would go to families above low-income thresholds because of the slow phase-outs of the Basic Income. It doesn’t make economic sense to hike taxes on middle earners only to transfer those funds right back through the Basic Income.

Here’s a better solution: Improve the existing transfer system. We have many smaller income supplements that follow the same structure as the Basic Income by providing a base benefit that is phased out with income. As examples, think of the GST Tax Credit or the Canada Child Tax Benefit. To the extent we have room in the budget to boost the incomes of those who are struggling, these existing tools can be enhanced. If we are looking for bolder action, how about consolidating the complex array of existing benefits into a simpler and more transparent package?

Unlike either the minimum wage or the Basic Income, enhancing and improving supplementary income transfers has the virtue of being both well-targeted and affordable.




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What’s the right policy tool to fight poverty?

    • Why not just raise the MTR on the lower brackets, if 25% clawback is too slow. Perhaps something like 30-35%? Combined with a higher VAT, I don’t think this would be quite so bad. And a 30-35% MTR is not so great a disincentive to work as the 95-100% METR for those on welfare.

  1. “What’s the right policy tool to fight poverty”?

    A job.

    • So you’re in favor of government funded infrastructure creation programs then? I knew you’d come around sooner or later.

    • Don’t be ridiculous. Only mouth breathing CRAP-CON Harper-Bots believe in working for a living. True progressives should spend their time thinking about and finding ways to leech the system for their own benefit. We live in a society where people don’t like to work, so they shouldn’t have to.

    • Er, jobs that maybe don’t pay enough is sorta the issue, right? If we had a mandatory maximum wage there’d be no unemployment at all, and no poverty either.Bit of a bolshy solution don’tcha think.

  2. The only difference from enhancing the tax credits and basic incomes is the phaseout. After all, everybody gets the GST credit as well.. they just don’t get it if they’ve earned enough money. Exactly like the basic income plan.

    So how you handle it is making the clawback progressive. Set the rate such that if they’re earning only a little, they get most of the transfer. But by the time they’re earning a reasonable income, it’s clawed back all of the transfer, although the clawback rate should never go above 0.90/dollar, just to be sure there’s always incentive to push for that bit more.

    Paying for it is always going to be an issue, but considering that with the program in place you could eliminate minimum wages, we would become very enticing for businesses. Especially if you then do the smart thing and eliminate corporate income tax and personal income tax, and instead replace it with a combination of consumption, carbon, dividend, and sliding scale capital gains/investment taxes.

  3. The idea that you can legislate your way to increased wealth is completely preposterous.

    Secondly, people like Milligan always use relative terms to describe poverty. That way, we can be sure it will never disappear. There will always be people who produce more than others, and so there will always be people who have more.

    If poverty were measured in absolute terms, it would be gone already. The poorest in Canada live better today than the richest did 100 years ago.

    But by using relative terms, people like Milligan can obsess about their transfers and their benefits and theit taxes and all this other mumbo-jumbo, all the while achieving nothing at all. We could do everything in this article, and relative poverty would remain unchanged. This has been proven by the massive growth of the welfare state over the last 50 years, which, according to progressives, has achieved nothing. In the end, all they want to do is to take money from some and hand it over to others, growing the power of government and shrinking the freedom and responsibilities of individuals.

    • “If poverty were measured in absolute terms, it would be gone already.
      The poorest in Canada live better today than the richest did 100 years
      ago.”

      Your conclusion is absurd, as is this beauty. In absolute terms i’m considerably better off than my great gran was; i’ll probably live twice as long and stand a good chance of doing so and remaining relatively healthy until well into my dotage.[ if i can lay off the bacon] Is this really an argument for not helping out the working poor who struggle still as much as she would have to meet both the rent and put bread on the table? Is this an argument for not ensuring some of the new wealth is not spread around a little more equitably? At least create more opportunities for moving up. You do this by reducing barriers, of which relative poverty is one.
      KM’s suggestion to transfer more income or lower tax threshold for the poor as opposed to MW or a costly GAI would do that.

    • The poorest in Canada live better today than the richest did 100 years ago.
      ….
      THAT was a 100 years ago and that statement is irrelevant. The poorest today often have a choice between whether to buy food or whether to have a roof over their head. Some of them do without necessary medications because they can’t afford them. Try living on less than $10,000 a year when basic rent is over a thousand a month and then judge.

      • Oh but they have tvs and cell phones now don’t they?[ just saving SCF the trouble of responding]
        They should just give up their addiction to alcohol, drugs and smokes, then they’d all get by…simple eh?[ did i miss any traditional Con tps at all?]

        • They might or might not have TVs, kcm, but not many that I know of have cell phones and I certainly wouldn’t begrudge them a television. All this stuff costs and if a person is either old, or a widow or handicapped physically or mentally, every little cost takes a bit out of the little they are receiving in the beginning. Some years ago, I met a very nice old single lady who was living on $700 a month and her rent at that time was $525. Whatever was left went for food and medication. She was always cheerful and didn’t complain but I always wondered how she did it.
          As far as smokers, I’ve seen some of the poor who can’t afford any smokes go to smoking corners and pick out the longest butts. Sad.
          Most of the homeless people that are addicted, yes, but generally they are already mentally ill and unable to work anyway. I wonder if they even have any income since you need to have an address to collect any kind of money.
          One homeless guy that I know of was an engineer for GM in his early years. His wife died and he went into a major depression and began drinking. Last I heard he froze to death under the bridge where he was finally living. It’s easy to judge until misfortune hits and life gets turned on its side. It can happen to anyone.

          • It’s as true as it ever was that the measure of a society’s worth can be judged by how well it takes care of the less fortunate and its poor.

  4. What’s the right policy tool to fight poverty?
    Get rid of the tool we already have.

  5. “Right tool”??….Well it sure as h.e.ll. is NOT relocating ALL manufacturing jobs(Canada and U.S.A.) to China, India ,and Mexico

    • Sorry I wasn’t clear. We have a rather portly, bewigged,globe hopping “tool” who is more interested in end times than present times.

      • Seldom have I read such an appropriate description of our
        Canadian P.M
        And to think I once voted for him……”Ignorance” should be cured by experience and education…….( I am a work in progress..I HOPE)
        When I make mistakes such as this( Voting Conservative at one time)

        It concerns me that a more permanent problem may prevail…STUPIDITY…..

        • I don’t know if it’s as much stupidity as gullibility. When someone can get you to vote against your own best interests because of some fast talking, nebulous dogma that can’t promise to deliver on its promises, then sits back and keeps collecting, all the while maintaining complete control – we have both the government and the belief it espouses.

          • Well.. with myself it was perhaps “wishful thinking”.I have supported Liberals and N.D.P(Provincially and Federally) over many years.
            I have voted for “the individuals” and “the party”.. ALL OF THEM . DO NOT carry out their promises in the long haul.

            Voting ONLY for one`s PERSONAL BENEFIT (and not the country as a whole) is one of our Social problems.
            Good example.. is the U.S………..not that we in Canada are that much better.
            I was tired of the “catch and release”, of criminals who committed SERIOUS crimes against innocents. By the politically correct ( N.D.P no better ) Federal Liberals.
            ( Good friends, victims))

            Under the Harper Government we now have more serious penalties for pot infractions meanwhile the more serious crimes are STILL going unpunished.
            Harper is also selling Canada`s future and our environment.

            The fire IS no better than the pan…….
            Take care and have a good week ahead in spite of it all :-}

  6. For all kinds of innovative ideas on how to reform/rethink our approaches to tax and social policy in Canada, see Alex and Jordan Himelfarb’s book Tax is Not a Four-Letter Word (Wilfred Laurier Press, 2013).

  7. Kevin is quite right to be concerned about how we would collectively pay for a basic income. We’ve started a provisional list of existing federal and provincial tax credits and expenditures that might be replaced by a basic income here: https://docs.google.com/spreadsheet/ccc?key=0AhxgYaXqTyb4dFc5UHh4Z2NTQXZWbi03ZGh0MmZrdFE&usp=drive_web#gid=0

    My own view is that while a basic income could replace many existing tax credits and programs, simple replacement of those programs is not sufficient to dramatically reduce poverty. Part of the problem with our existing system is that there are gaps. For example, the GST credit, while broad in its reach, is far too small (I’m not opposed to increasing the benefit level and the frequency as a way of implementing basic income). The CCTB and National Child Benefit, on the other hand, are much more generous but obviously only targeted at families with children. Our existing array of income security programs is pretty good for families with children and seniors. Where it is failing is for working-age Canadians, especially those without children under 18.

    It is worth keeping in mind that the longer-term costs of poverty, especially in the areas of health care and prisons (see http://www.thestar.com/opinion/editorialopinion/2011/02/20/tough_on_poverty_tough_on_crime.html), are very significant.

    We are calling for basic income pilot (http://basicincomepilot.ca) precisely because we want to figure out the best way of closing the gaps that exist and how much it might cost to do so.

  8. What a load of half-baked rubbish. That there isn’t a single poverty expert who doesn’t support a living wage, tells you a lot. “GST tax credit”? Hard to keep a straight face on that one. Completely inadequate in responding to the magnitude issue.

    Pathetic economics and total fail. Why was this rubbish article even published?

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