Work incentives: perceptions and reality

What is the population’s level of understanding of the work incentives and tax measures developed by governments? That is one of the questions the authors of this study sought to answer by comparing perceptions with reality.

A unique study

This is the first study to assess people’s level of understanding regarding tax credit recovery and tax incentives to work. People’s level of understanding is key because of its potential impact on their decisions about work and well-being.  
 
To that end, in November 2024, researchers from HEC Montréal conducted an original survey of 2,510 Quebecers aged 18-69 to assess their understanding of basic tax concepts, principal tax measures supporting work and employment, and the impact of those elements on their employment-related decisions. 
 
Researchers also used Statistics Canada’s Longitudinal Administrative Databank to analyze the real evolution of marginal effective tax rates (METR¹) and of effective participation tax rates (EPTR²) in Quebec from 2017 to 2023, using the Disposable Income Simulator – a tool developed together with a research team from UQAM. 

Significant findings

Key findings from this study include:

• On average, tax measures generate high METRs and EPTRs among the population. However, these rates will vary widely over time and according to individual characteristics (personal income, age, marital status, number of children, etc.). 
• Yet, only 28% of respondents said that they took account of tax measures in their employment-related decisions. This proportion decreases with age, going from 35.4% among 18-34-year-olds to 19.5% among 60-69-year-olds. More than 54% did not even take account of tax considerations. 
• Nearly half (46%) of respondents answered successfully the 2 questions assessing their understanding of the impact of marginal rates as an incentive to work more, but only 4,7% understood the disincentive effects of tax credit recovery as well.

Effects on public policies and society

This study highlights the gap between the intent of tax policies and their perception within the community. It provides governments with critical data to rethink how to develop, communicate, and explain tax measures, which could help people to make better decisions about their working hours and to improve their well-being. Findings from this study could also be leveraged in other countries.

Research team

Nicholas-James Clavet and Xavier Dufour-Simard, researchers; and Pierre-Carl Michaud, Full Professor, Department of Applied Economics, Chairholder, Jacques-Parizeau Research Chair in Economic Policy, and Scientific Director, Institute on Retirement and Savings, HEC Montréal 

Research partner

CIRANO – Centre Interuniversitaire de recherche en analyse des organisations

1. The METR measures the ratio of additional work income returned to the government for tax reasons for an individual already earning an income.
2. The ETPR measures the ratio of work income returned to the government for tax reasons for an individual who went from zero income to earning a positive income.