Tuesday, March 13, 2012

Towards a "living wage" in Canada

A number of years ago, Canada's statistics agency got rid of the concept of "the poverty line."    Instead they came up with what is called the "low income cut off" or LICO.   For the most recent year for which there are full statistics, 2010, a single person living in a major metro area (500,000 or more people) falls below the LICO with an income of $22,637 before taxes; for a couple with no kids, $28,182; and for a family of four (two and two), $42,065.    The numbers are somewhat less for rural areas but it is more than obvious there is something wrong with a system that allegedly claims to lift up the lowest strata in our society out of indignity but in fact comes nowhere near to that goal.

Yes, there are negative income taxes under all sorts of names -- at the federal level the GST credit, the Working Income Supplement, the Child Tax Benefit and for seniors the Guaranteed Income Supplement; at the provincial level provincial sales tax credits, additional child tax credits (which are combined with the federal amount) and senior's benefits.

The problem is that on the one hand, these are barely enough to lift the poorest out of bare subsistence.   On the other hand, those benefits that really do work are either not enough or they are undermined by other benefits that act at cross-purposes.

Here's one example:    The Working Income Tax Benefit, introduced in 2007, acts as an incentive to get people to get out of welfare and back to work by giving them some "start up" money.    And that is all well and good.    The only problem is that the maximum benefit for singles runs to about $80.33 a month, and it gets clawed back after one hits just over $11,000 of income.   Once you reach $17,500 or thereabouts, it's gone.   For families, it is somewhat more but the benefit goes once you hit just under $27,000.

Another example:  The so-called Universal "Child Care" Benefit, which is fully taxable and serves no purpose other than an ideological one.    It would have been far better to use it to top up the already operating Child Tax Benefit which was quite successful in getting tens of thousands of families to a zero net income tax situation so it could have helped even more families.

Radical ideas are needed here.   Much as the minimum wage should be raised to $15.00 per hour, this may be too radical a shock to the system if done overnight.    So instead perhaps the government should take a serious rethink of income redistribution which is what the income tax is in part about.   This is what I would suggest as we gradually work towards the living wage.   It's been suggested before in various forms, but this is what I would do:
  • First, get rid of all the myriad benefit programs, including all the various federal and provincial credits as well as the current form of welfare, and work towards a guaranteed income, with the LICO as a threshold.    Anyone, whether a pensioner, worker or chronically unemployed, earning less than the cut-off would get a monthly supplement for the difference based on the previous year's gross.   This includes income from all sources including lottery winnings, inheritances and worker's compensation settlements.   Those and other types of tax free income should remain tax free but should count against entitlement eligibility.
  • Second, the personal tax exemption should be raised much higher.   The only province that comes even close to what it should be is Alberta, but which also did this deliberately several years ago because it has a flat tax.   This year the federal exemption is $10,822.   Given the period during the 1980s and 1990s when we experienced bracket creep, a more accurate exemption should be about $14,588.   Also get rid of some of the "gimmie" tax breaks and replace it with real tax reform -- lower rates and a fairer system.    Families under, say, $80,000 (which isn't that rich by any means) shouldn't have to pay more than 15% combined federal and provincial.    This also includes resetting the threshold of the alternative minimum tax (which is affecting middle income families, not just the rich) from $40,000 to about double that with increases tied to inflation.
  • Third, we need to put back into place the legal principle that there should be equal pay for work of equal value.    This would require a more rational comparison of jobs and not an ideological one than some of the exercises 25 years ago, but women are still getting the shaft (so to speak).  There is general agreement that the fact that male administrative assistants get paid more than female "secretaries" is discrimination; but what of male jail guards and female health care personnel in jails -- well considered they should get equal treatment in that they provide an equal amount of output for the state.
  • And fourth:    Geared to income day care -- this is a no brainer.    Many other developed democracies offer it on a universal basis, but geared to income may be more acceptable to some of those ideologically driven.
This would take several years to roll out -- I'd say between 6 and 10 to do it properly.    But it is eminently affordable for this reason that people with good incomes make better lifestyle choices in personal health, which means less visits to doctors and hospitals and therefore costs the system less.   The savings can go back in equal measures to improving health infrastructure and boosting the amounts paid to lower income people.    Eventually when we achieve the goal of full employment (5% or less) then there would be little to no money need to be paid to get people to the LICO because they would be earning it anyway.

Out there?   Sure.   But I'm not the first to suggest it and I won't be the last.   It's worth talking about, though.   If we want to differentiate ourselves from Americans for the next generation this may be how to do it.

1 comment:

Frunger said...

The LICO method is fundamentally flawed in that it is a "comparative" measure against the average household.
The problem is that if higher income brackets gain nominal wealth faster than the "poor" category (and they will even if their rate of growth is the same) then the average household income numbers go up.
There could be no change to wages or the cost of goods to those people below the average but they are now included as "poor" because of their relative position to the average has decreased.

A win for the poverty industry but not an accurate reflection of true poverty. Also, if they own a TV bigger than 40", HBO or an XBOX they should by automatically excluded.

If you examined the finances of and wandered into many of the households under the LICO line you'd be able to figure their problem out in 5 minutes. It isn't often the fault of "society" for not taking care of them properly or a lack of social assistance.