The disadvantages of a progressive tax show up in behavior, budgets, and paperwork long before anyone finishes writing the check. Rising marginal rates weaken the reward for extra work and investment, quietly raise real tax bills through bracket creep, penalize some dual-income marriages, hide steep surtaxes inside phase-outs, push capital toward shelters and lower-tax jurisdictions, load filers with compliance costs, sweeten the payoff for evasion, and tie government revenue to the volatile incomes of a small group at the top. The U.S. federal system runs seven brackets, with rates climbing from 10 percent to a top marginal rate of 37 percent for single filers earning above $640,600 in 2026.1Internal Revenue Service. Revenue Procedure 2025-32 Each of the costs below flows from that escalating structure.
Weaker Incentives to Earn and Invest
The more you earn, the larger the cut the government takes from each additional dollar. A single filer whose taxable income crosses $105,700 in 2026 sees the rate on new earnings jump from 22 percent to 24 percent.1Internal Revenue Service. Revenue Procedure 2025-32 At the top bracket, 37 cents of every extra dollar goes to federal income tax before state taxes enter the picture. That shrinking after-tax reward changes behavior. Economists call it the substitution effect: when the payoff for an hour of work drops, some people choose not to work that hour. They retire earlier, turn down overtime, or pass on a higher-paying role that would require relocation. The effect tends to be strongest among top earners with the flexibility to dial effort up or down.
Investment gets the same treatment. Interest income is taxed as ordinary income, so a saver in the 37 percent bracket keeps only 63 cents on each dollar of interest earned.2Internal Revenue Service. Topic No. 403, Interest Received Short-term capital gains face the same rates.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses When the government captures a large share of the return, the reward for putting money at risk shrinks, and some capital sits on the sidelines or chases tax-advantaged vehicles instead of the most productive opportunities.
Bracket Creep Raises Real Tax Bills
Even when your real purchasing power stays flat, inflation can push you into a higher bracket. A three-percent cost-of-living raise in a year when prices also rose three percent leaves you no richer, but a chunk of that raise may be taxed at a higher marginal rate. Bracket creep quietly raises the effective tax rate on millions of filers without any vote in Congress.
Federal law partly addresses the problem. Under Internal Revenue Code Section 1(f), the IRS adjusts bracket thresholds, the standard deduction, and dozens of other provisions annually using the Chained Consumer Price Index for All Urban Consumers.4Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed For 2026, the IRS published updated figures through Revenue Procedure 2025-32.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The catch is that the chained index tends to grow more slowly than the traditional Consumer Price Index because it accounts for consumers substituting cheaper goods when prices rise. Over time the slower adjustment means bracket thresholds don’t quite keep pace with the price increases people actually experience. The gap is small in any single year but compounds over decades. Certain provisions, like the thresholds for the Net Investment Income Tax, are not indexed at all, making bracket creep a permanent feature there.
The Marriage Penalty
Progressive brackets interact in punishing ways with the decision to get married. When two earners file jointly, their incomes are combined and taxed together. If both spouses earn similar amounts, the combined total can land in a higher bracket than either would face alone.
Congress has eliminated most of the penalty at lower and middle brackets by setting joint-filer thresholds at exactly twice the single-filer amounts. The fix does not extend to the top. For 2026, a single filer hits the 37 percent bracket at $640,600, so two single people at that income each would stay below it. Married and filing jointly, the 37 percent rate kicks in at $768,700, far less than double the single threshold of $1,281,200.1Internal Revenue Service. Revenue Procedure 2025-32 A dual-income couple earning $1 million combined can owe thousands more than they would as two unmarried filers, purely because of how brackets compress at the top.
Hidden Surtaxes and Phase-Outs
The statutory rate is only part of the story. As income rises, deductions and credits phase out, clawing back benefits and effectively adding an invisible surcharge on top of the stated bracket rate.
The American Opportunity Tax Credit, for example, phases out over a $10,000 income range for single filers. Because the maximum $2,500 credit disappears across that narrow window, every additional $100 of income costs the taxpayer $25 in lost credit on top of ordinary taxes. Phase-outs for adoption credits and other provisions impose similar hidden rate increases across different income ranges.6Tax Policy Center. How Do Phaseouts of Tax Provisions Affect Taxpayers
Explicit surtaxes stack on top. The Net Investment Income Tax adds 3.8 percent to investment income for single filers above $200,000 and joint filers above $250,000.7Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax Those thresholds have never been adjusted for inflation since the tax took effect in 2013, so each year inflation drags more filers above the line. A top-bracket taxpayer with significant investment income can face a combined federal marginal rate above 40 percent before state taxes.
The Alternative Minimum Tax adds another layer, requiring certain filers to recalculate their liability under parallel rules that disallow some deductions and apply different rates. Filers caught in the AMT exemption phase-out range see their effective marginal rate spike because they lose the exemption and pay the AMT rate on additional income at the same time.8Internal Revenue Service. Topic No. 556, Alternative Minimum Tax The net effect is a marginal rate schedule far more jagged than the clean seven-bracket table suggests.
Distorted Investment and Capital Flight
Every tax distorts economic decisions to some degree, but progressive rates amplify the distortion because the penalty for earning more grows at each step. High earners and businesses face steeper incentives to rearrange their affairs around the tax code rather than around productive activity.
The most visible symptom is the tax shelter industry. When the top marginal rate is 37 percent, an investor saves 37 cents in tax for every dollar reclassified from ordinary income to a lower-taxed category. Long-term capital gains, for instance, are taxed at rates as low as zero and no higher than 20 percent for most assets.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses That gap between ordinary and capital gains rates creates a powerful incentive to structure transactions as long-term investments even when the underlying economics don’t call for it.
Capital flight is another consequence. Investment capital is mobile, and high-income individuals and multinational corporations can legally relocate assets, income streams, or tax residency to lower-tax jurisdictions. Intellectual property is particularly easy to move. When top marginal rates are high relative to competitor nations, some capital simply leaves, shrinking the domestic tax base and the pool of investment available for job creation.
Complexity and Compliance Costs
A system with seven brackets, dozens of phase-outs, parallel AMT calculations, and surtaxes for specific income types is expensive to comply with. Filers navigate Form 1040 plus a stack of specialized schedules, and anyone in AMT territory may need Form 6251 as well.8Internal Revenue Service. Topic No. 556, Alternative Minimum Tax The IRS estimates that tax compliance imposes over 6.5 billion burden hours on the public each year, representing 63 percent of all federal paperwork burden.9Internal Revenue Service. Publication 5743 – Taxpayer Compliance Burden Independent estimates put the total economic cost, including time and out-of-pocket spending on software and professional preparers, at roughly $460 billion to $550 billion annually.
The burden falls unevenly. Large corporations maintain full-time tax departments and absorb those costs as routine. A small-business owner filing an LLC or S-Corp return might pay $750 to $2,500 or more for professional preparation alone. An individual with rental income or freelance earnings can expect fees of $500 to $1,500 per return. The people least equipped to afford professional help are often the ones most at risk of missing legitimate deductions or making errors.
Government bears its own compliance costs. The IRS must maintain enforcement, auditing, and processing systems to police a code that runs tens of thousands of pages. Every new phase-out or credit creates new forms, new instructions, new audit targets, and eventually new unintended loopholes that require yet another legislative fix.
Bigger Payoff for Evasion
The higher the marginal rate, the greater the reward for hiding income. The IRS projects a gross tax gap of $696 billion for tax year 2022, representing the difference between what taxpayers owe and what they voluntarily pay on time.10Internal Revenue Service. The Tax Gap Not all of that gap is driven by progressive rates, but the incentive structure matters: someone in the 37 percent bracket gains nearly four times as much from hiding a dollar of income as someone in the 10 percent bracket. Cash businesses, unreported freelance income, and offshore accounts all become more attractive as rates climb. Each dollar shifted underground narrows the base and pushes a heavier burden onto compliant filers.
Revenue Volatility for Government Budgets
Because a progressive system collects a disproportionate share of revenue from high earners, government budgets become tethered to the financial fortunes of a relatively small group. When those incomes dip during a recession, revenue drops far faster than overall economic output.
The problem is sharpest with capital gains. High-income filers realize the bulk of capital gains, and those gains are notoriously cyclical, surging during bull markets and collapsing during downturns. A government that builds its spending commitments around boom-year revenue finds itself running deep deficits when the next recession arrives. Recessions are also when demand for safety-net programs spikes, so the timing mismatch is painful: revenue craters exactly when spending needs climb. Governments are forced into abrupt cuts, tax hikes, or borrowing at the worst possible moment.