Toward Smarter Governance: A Final Look at the Negative Income Tax

This post is the third in a series on the negative income tax. The first and second installments can be found here and here.

Unlike many government policies, the negative income tax (NIT) is not an improvement of, or supplement to, existing programmes. Instead, it is intended to replace them. By unifying taxation and welfare, the NIT could improve public finance in Canada.

Currently, Ottawa and its provincial counterparts target poverty with an array of benefit programs including the Guaranteed Income Supplement (GIS), Employment Insurance (EI), Old Age Security (OAS), etc. Furthermore, they create regulations such as minimum wage requirements, workers’ compensation rights, and the Canada Pension Plan (CPP) that shift the “burden of equity” unto the private sector. Finally, the complexity of Canada’s tax code necessitates an enormous bureaucracy: the Canada Revenue Agency (CRA).

The bureaucratic excess facilitated by the Canadian government exists because the current fiscal regime requires so much discretion, in addition to imposing an expansive web of rules that require expertise and compliance confirmation.

Discretion is especially unfortunate, since it compels those in dire need to demonstrate their eligibility for benefits. This process scrutinizes people with low social capital unfairly and, in some cases, precludes their dignity. On the contrary, the NIT would benefit all individuals indiscriminately. In addition, simplifying the tax code and universalizing benefits delivery; it would erase the need for bureaucratic discretion and expertise, meaning that more welfare spending could go to beneficiaries as opposed to overhead. Not to mention that reducing the size of government bureaucracy would alleviate private industry–to an extent–from the aforementioned “burden of equity.”

The complexity of Canada’s tax code has spawned an industry that helps individuals comply with its rules while paying as little as possible. This industry, which employs otherwise productive workers, creates no real value. Instead, its sole function is to secure a larger share of money for the client and less for the government. Moreover, although the Canadian tax system is “progressive,” those with more wealth have the advantage of purchasing these services, whereas low-income individuals do not.

Implementing the NIT also has implications for minimum wage policies. In practice, minimum wage requirements place upward pressure on the supply of labour (since workers can earn more by working more), while placing downward pressure on the demand for labour (since employers have to compensate for an increase in wages without a subsequent increase in productivity).

Proponents of the minimum wage typically argue that the policy, in practice, does not increase unemployment or that the increase justifies the rise in wages for those that have employment. In contrast, the NIT boosts the income of low-wage earners such that a minimum wage is no longer necessary to guarantee a minimum living standard.

By replacing the minimum wage with the NIT, employers could negotiate fair wages with their employees. And since it would guarantee an income for retired persons, programs designed to keep seniors out of poverty would become unnecessary. Contributions to CPP would no longer have to be mandatory, since those who choose not to save would a different safety net – their guaranteed basic income – for their later years (although it is unlikely that people would choose not to save, altogether).

The NIT, in short, would allow for a fairer and more efficient use of public finances. It would also guarantee a minimum standard of living without necessitating excessive bureaucracy or limiting people’s actions. Most importantly, it would apply universally, preventing the possibility of denying benefits to those who desperately need them and ensuring equality of treatment across all cases. Despite pains that the policy might cause for bureaucrats and tax lawyers, it would benefit the vast majority of Canadians.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

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