In British Columbia, the province expects over $16.6 billion from personal income taxes in 2024. For families and individuals, these taxes represent a substantial expense that shapes everyday economic choices. While BC’s income taxes are relatively less burdensome compared to other provinces, they still significantly affect disposable income and create various indirect effects by altering work incentives. For lower- and middle-income individuals, personal income taxes also interact with various other programs, from income supports to payroll taxes, and the combined effect is crucial for understanding how policies influence work incentives, disposable income, and the broader economy. This overall effect can be best measured using a simple concept known as the Marginal Effective Tax Rate (METR), which is the fraction of each additional dollar earned that is lost either directly through taxes or indirectly through reduced benefit amounts. Surprisingly, lower- and middle-income families often retain less of their additional income compared to high-income families. Reforming targeted income support programs by combining several existing arrangements into one could be one option to consider. Reform can also include lowering marginal tax rates and eliminating some of the seven tax brackets. There is also scope for British Columbia to follow in Québec’s footsteps by adopting an interesting measure called a “benefit shield.” This innovative policy would offset any lost benefit income for a worker that increases their employment income. Addressing the high METRs for many British Columbians is essential for improving work incentives, economic productivity, and growth.
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