INTRODUCTION

Universal Basic Income (‘UBI’) is an income distribution system in which everyone, no matter what their economic situation, is paid a monthly income that is sufficient for their basic needs – with no strings attached.

In 1969, Richard Nixon was persuaded by 1,200 economists (including John Kenneth Galbraith and Paul Samuelson) of the value of a basic income plan. They wrote: “The country will not have met its responsibility until everyone in the nation is assured an income no less than the officially recognized definition of poverty.” Nixon’s 1970 Bill passed in the House, but failed in the Senate, after Nixon was persuaded to drop his support by the libertarian Martin Anderson.

Several countries (including Canada, USA, Finland, Switzerland and India) are considering implementing some form of UBI, although it has yet to get past the pilot project stage. The general approach is to regard UBI as a replacement for the hodgepodge group of welfare support systems. Few pilots are considering a true UBI, as the payments are only considered to be made to those in need. There is a lot of controversy relating to the absence of control over the recipients, even though several studies have shown that most recipients would use the money for basic needs while looking for a job, or upgrading skills or education.

2019 and 2020 became pivotal years for the recognition of UBI. It started in 2019 with Andrew Yang, a candidate for the Democratic nomination for the US Presidency, who, before he retired from the race, included UBI in his platform. Then, in 2020, came the COVID-19 coronavirus. With unprecedented levels of unemployment, governments needed to get money into the hands of their people to ensure basic needs were being met (and to preserve some elements of the economy). While not specifically called UBI, many recognized the similarities.

While a UBI would eliminate most poverty by definition, its value to society would be far greater if it is seen as a wealth distribution system, reducing the increasing gap between the wealthy (the so-called 1%) and the rest of the world. That gap is caused, not so much by the greed of the wealthy (although there is much of that), but by the reducing value of human labor caused by technology. In effect, the gap comes from entrepreneurs, who are investing and creating economic value while building their wealth, and workers, who are seeing their economic value deteriorate.

Most discussion about the loss of jobs to automation is occurring at the macro level – job loss in an industry or for a country. To understand it better requires looking at the micro level – how small businesses deal with employment. 

Let’s consider a simple example where a restaurant employs two dishwashers at $10/hour for a total hourly cost of $20. If an automatic dishwasher can do the same dish washing function for $12/hour, then the value of human dish washing has dropped to $6/hour. Even ignoring the other costs associated with human labor (overtime, vacations, supervision, benefits), the owner of the restaurant will not want to pay more than $6.

The understandable desire to set a minimum wage that would allow a worker to earn enough to provide basic living costs ignores the business reality that an increase in labor costs just justifies an earlier introduction of automation. This is the primary reason why studies have shown that increasing the legal minimum wage increases unemployment.

There’s also a lot of misunderstanding about UBI.

UBI is opposed as a concept by several groups:

• Libertarians who object on principle to giving anything away to people without their earning it.
• Thoughtful taxpayers who are concerned that most people would not use their time meaningfully if you take away the financial incentive to work. In other words, they believe that people are inherently lazy.
• Financially-oriented thinkers who do not believe that the economy can handle UBI at a meaningful enough level.
• Self-motivated workers in government and not-for-profit organizations currently providing services that UBI would make unnecessary.

There are logical elements in the arguments of each of these groups.

While UBI would eliminate poverty, that is not the primary reason that its implementation is inevitable – even if it should be. The primary reason is that government will need to inject money into the economy as the number of unemployed workers rises, so that all people will be able to afford at least the basic essentials of living, and businesses will have consumers who can afford to buy their products and services. The costs of providing and administering the current mix of employment insurance and welfare services when the unemployment rate exceeds 30% (never mind 90%) would be prohibitive.

UBI is another, if major, government expenditure. Its costs would be partly offset by savings resulting from the elimination of a lot (but not all) of unemployment, welfare and income security programs – and the associated bureaucracies that support them. The residual would have to be paid via taxation. (In all my discussions, I assume that government – like business and people – only pay for expenses, rather than investments, from income. Debt or the debasement of currency by money printing would be a poor and unnecessary justification for UBI.) If the sources of taxation are layered so that low earners, such as those whose only income is UBI, pay no taxes, while those earning more, including those who have no need of UBI, pay substantially higher taxes, then the implementation of UBI would help to reduce the wealth gap. (This is discussed in more detail below.)

UBI is just an effective mechanism to restore the economic cycle, that also happens to eliminate poverty. Let me explain.

The roles of government include:

• Providing funding of infrastructure (roads, bridges, etc.) and industry incentives for businesses.
• Providing funding of social benefits (medical, educational, housing) for people.
• Establishing safety protocols and laws for societal functioning.
• Protecting society from lawbreakers and other safety issues (police, fire workers).
• Protecting its borders, physically and economically (including the military).
• Contributing to the protection of other societies.

Yet government does not earn money itself, and is dependent on taxation in various forms, of which income taxes are a major source (over 50% in the case of the Canadian federal government).

The only viable replacement sources of income taxes for government are consumption taxes (also known as sales taxes e.g. GST, PST, VAT) and corporate taxes (which would require businesses to make a profit). But businesses need consumers to buy their products and services, and to invest their savings in the businesses so that the businesses can expand (and make more, or at least some, profits). And to do this, consumers need a source of funds. This is the basic economic cycle that will be disrupted by joblessness on a large scale, and will necessitate some new program such as UBI.

To replace current income taxes in Canada, a consumption tax would average around 35%. This would best be achieved with a layered structure. For example, basic necessities would incur a low tax rate, other goods and services would incur a modest tax rate, while luxury goods would be highly taxed. In effect, the purchases of wealthy people would contribute a higher pro-rated source of government revenue, achieving an element of the desired transfer of wealth.

Another viable taxation source is a VAT (Value Added Tax) in which a tax is paid on the increased value of all products or services, like a consumption tax but including the sale of raw material or products or services used in the creation of a finished product. This is a far more complex approach, which would be loved by the civil servants required to police it.

There is much talk about wealth taxes. This is a politically appealing option, but those governments that have tried it have found it ineffective. The wealthy find ways to avoid it, and anyway the total amount of taxes that could be raised are far less significant than people assume.

None of this negates the opportunity for entrepreneurial activity, which, when successful, would provide economic growth, in addition to wealth for some people, and paid jobs for others. (Think of the encouragement for starting up a new business or service if you already have sufficient income for your basic needs, and you can get staff without needing to pay them until the business can afford it!)

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