Universal Basic Income: Part Five

This is part 5 of a 6 part series on Universal Basic Income (UBI). My goal is to help you understand the facts involved in this concept so that going forward you will have a firm grasp on the subject matter and will henceforth be confident in forming your own opinions and conclusions on the topic.

I’m a numbers guy, which is obviously pretty handy in my line of work. Microsoft Excel and I are good buddies. So in order for all of this to make sense to me I leaned into my comfort zone. I set up a table on the average salary of a canadian which, if you recall from a previous article, was $58,000. I added $30,000 UBI onto that salary giving that typical canadian $88,000/year. I then applied the 2020 Marginal Tax Rates to this salary and compared it to the $58,000/year salary on taxes paid each year. This brings us to the question everyone wants to ask: “How does this affect MY bottom line and MY family. At the end of the day, what’s left in my wallet”.

Notwithstanding a COVID-19 increase of some kind and the fact that we would most likely have to increase taxes in order to finance a UBI in some form, we will use the current marginal tax rates for 2020. To all the accountants reading this, yes I realize that taxes paid vary from individual to individual depending on personal circumstances such as write-offs etc, but for the sake of this example we need a constant.

I should note that in 2017 the Fraser Institute found that the top 20% of family income earners in Canada (i.e. two working adults earning an income as a family unit) constituted any family unit that made over $186,875 or higher. This resulted in those families earning 49.1% share of the income earned in Canada, yet they paid 64.4% of the country’s income taxes. One could easily argue, due to Canada’s graduated tax system, that this would push more people into the 20%. In that same year, individuals making over $70,000 accounted for only 10% of taxes filed. Again, this assumes that the average income in Canada is $58,000/year. More Canadians would be pushed into the higher tax bracket and into the top 10% of income earners in Canada. Yes ladies and gentlemen, you are in the top 10% of income earners in Canada if you make over $70,000/year. We will use that as context.

To my pleasant surprise, even though the individual’s average taxes paid would increase from $16,447.06/year to $19,289.14/year, since Canada has a progressive tax system and I included a mandatory 5.25% CPP contribution and a 15% tax on the first $30,000, the individual would have a 65% increase in their take-home pay, up from $41,522.94 to $68,894.61/year.

This increase stems from a couple of areas. One is obvious – the government gave this individual an additional $30,000. Even though we have that progressive tax system, the impact is minimal on the average Canadian. The second reason is that the individual would not need to make EI contributions as that social program would no longer be necessary. If you’ve ever been laid off or needed EI for sick benefits or maternity/paternity leave you know that the current EI annual maximum in 2020 is 55% of your insurable earnings, up to a maximum of $54,200. This equates to a weekly maximum benefit of $573/week taxed. This saving, along with the money saved from businesses who would also not be making their EI contribution, saves the individual money, and gives them a larger benefit if they were ever in need.

I’ve based all of this on the average Canadian earner. But what happens to the top and bottom earners on the spectrum? Have no fear, I of course ran those illustrations as well, not just for kicks and giggles, although that was certainly part of it. As I am a resident of Ontario I used those marginal tax rates. A person who earned $30,000 prior to the UBI would now be making $60,000 after the UBI is applied and would have to pay 11.38% (+$896.94) more in taxes. However, their take-home pay would increase by an additional 131.57% (+$29,103.06). The top earners, who already pay significant tax on their income, would see a slight increase in taxes owed but their take-home pay would also increase substantially. An individual who made $100,000 would now be making $130,000 including the UBI. Those taxes would increase by 15.87% (+$4,760) but the bottom line increase would be 36.05% (+$25,239.86).

I hope I’ve helped you wrap your head around all the facets of a Universal Basic Income. The tax implications and what will become of social programs that have been with us for a very long time and upon which so many of us are dependent, are relevant, however what most of us are concerned about is the sum of all parts: How it would affect our own personal financial situation. In my final article I will tie all of this together in a nice, neat package.