Published on the site in the Financial Post (www.nationalpost.com), September 10, 2008
May's Costly War on Poverty
by
Pierre Lemieux
It looks like it might be a modest and even virtuous plan. But sometimes seemingly virtuous ideas don't hold up in the face of reality. That is the case with the Green party leader Elizabeth May's proposal for a "Guaranteed Liveable Income" or "GLI."
The Party's program is not clear about the exact nature of the proposed guaranteed income -- the details still needs to be worked out, its Web site makes clear -- and it provides no cost estimate. But the goal is clear. "We want to wipe poverty out for good," May states.
Ms. May mentioned the goal of a $25,000 annual guarantee. Nobody earning below this amount would pay any taxes, and his income would be increased up to this threshold.
At first glance, the proposed program may not look that ambitious. Government transfers already bring to $26,700 the actual after-tax income of the lowest-quintile families in the country. But we have to look closer. This is only an average, and it covers all family members. If the goal is that every member of a poor family gets the equivalent of $25,000 per year, the annual cost of the program would exceed $400-billion. Moreover, the incomes of unattached individuals are currently far from $25,000, and bringing them up to par could cost another $100-billion. These back-of-the-envelope calculations suggest a program cost of $500-billion.
On the other hand, all social, income and labour programs (excluding health and education) in Canada cost about $130-billion to all levels of government. Thus, abolishing all these would still mean a net cost of $370-billion for the Green Party's guaranteed income scheme. This corresponds to about 68% more than actual total government expenditures by all levels of government in Canada. Taxes would have to increase by a similar percentage.
I suppose that the proponents of the program would reply that the guaranteed $25,000 income will only apply to the family, whatever the number of its members, thereby bringing the cost of the program roughly in line with what is already spent on the existing programs of income maintenance.
However, this answer won't do the trick. We have to look at the incentives involved. If a family of two parents and two children gets an annual guaranteed income equal to the income of an unattached individuals, that is, $25,000, some families will split in order to grab another guaranteed income. So, the net cost of the program would be somewhere between zero and the upper estimate of $370-billion.
Yet, this still ignores other incentives created by the program. If an individual gets $25,000 for just existing and smiling to the state, many will decide not to work, or to work on the black market after cashing the government check. Here, the Green party has been more realistic-- in a sense. It promises that there will be no "claw-back" when people getting the guaranteed income start to work. That is, they would be able to keep the whole $25,000 -- "one simple, straightforward cheque," said Elizabeth May. But the conclusion is that the proposed "Guaranteed Liveable Income" is not actually a negative income tax, as guaranteed income programs are usually conceived, but a straight subsidy of $25,000.
Here, we are again getting into real money. Giving $25,000 to (or not taxing it from) the 9 million Canadian families and the 4.5 million unattached individuals would cost more than $330-billion, which implies a net cost of about $200-billion for the program.
Consequently, a net cost of $200-to $370-billion seems to be a good back-of-envelope estimate of the Green party's guaranteed income plan. They should have made the calculations themselves.
This assumes that all the other welfare programs would in fact be abolished, and that, in a couple of decades, we wouldn't find ourselves with both a guaranteed income program and a patchwork of welfare handouts designed for favoured minorities. Consider also that the Green party's scheme would create a new entitlement, and strengthen the idea of some people that they have the right to live off the labour of others. It would simultaneously increase the dependency of the people towards the state.