Are Federal Tax Rates Disincentivizing?

The argument over whether federal tax rates act as a disincentive to growth has been raging since the progressive income tax was first introduced. A progressive tax increases the more money you earn. As a result, those who make more money pay a larger percentage of their income to taxes each year than lower-income individuals. Some argue that this leads individuals to settle for a lower income because raising an income would result in higher taxes. Though economists have attempted to quantify this effect for some time, studies point in both directions.

The Disincentive Argument

The argument against progressive taxes is logical. It is based on the idea that a person presented with two options - work a lot harder for a little more money or stay where you are - will choose the status quo if the incentive is not great enough. With a progressive tax, a person will still make more money if they increase an income. However, the more you earn, the more you will be taxed, so increasing your income becomes exponentially harder the higher you climb. Instead of receiving a one-to-one return on investment, the progressive tax returns only 1-to-3 or 1-to-4. The smaller the return, the less likely a person is to make the investment.

The Opposing Argument

On the other side, proponents of the progressive tax show that once an individual reaches a certain income level, the increase in taxes represents a smaller change in lifestyle than it would for a lower-income individual. For example, if you are taxed at a rate of 25 percent as a middle-income individual, you may be taxed at a rate of 35 percent by increasing your salary significantly to enter the next income bracket. However, this 10 percent increase will not change your quality of life because you are already earning sufficient income. This argument states that any return, even if it is 1-to-5 or smaller, will will make it worth it to a person in this tax bracket.

Which Argument Holds True?

It is more likely that an individual moving from a low-income tax bracket to a middle-income tax bracket will be disincentivized than a person moving from middle to high. In the United States, the lowest tax brackets represent nearly no income tax at all. If these individuals were to take even a small step up, however, they would be cut off from not only tax breaks but other social services. For example, many qualify for medical care assistance and assistance in paying for college and education. The argument that federal taxes directly affect choices on income shows the most impact on these low middle class individuals.


Statistics and facts can be provided to support either argument for or against progressive tax. Ultimately, the decision is one of personal economic philosophy. For an individual who thinks economic incentive is the best way to provide upward mobility in an economy, progressive taxes are a problem. For an individual who believes upward mobility can be achieved through proper social services and support, progressive taxes are a solution.

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