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Last month the federal government’s new Canada Child Benefit program came into force, replacing and consolidating an assortment of previous programs. However, little attention has been given to how this policy change, along with others from the Trudeau government — including the expansion of the Canada Pension Plan — will exacerbate a longstanding economic problem in Canada: high marginal effective tax rates and the resulting work disincentives faced by some moderate- and middle-income Canadians.

The marginal effective tax rate is simply the amount of money you lose to taxes, including the reduction of government benefits, when earning an additional dollar of income.

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Economists worry about high marginal effective tax rates because they weaken the incentives for people to earn extra money by working additional hours or investing in their skills — actions that increase a person’s current and likely future earnings. If you consider working and earning more income but you will only keep a portion of each additional dollar earned, you will assess the costs and benefits of doing so. If the amount you keep is too small, you may decide not to expend the extra effort.