Incremental tax

An incremental tax is a tax rate that adjusts based on the reported level of income. This usually means that the tax rate increases as the reported income level increases. The intent behind this type of tax is to reduce the tax burden on those people and businesses at the lower income levels. A problem with incremental taxes is that it can make investments unprofitable when the resulting income moves an entity into a higher tax bracket. Investors may shift over to tax-free investments (such as municipal bonds) at the higher incremental tax levels, rather than pay the higher tax rates. Very high incremental tax rates tend to result in more extreme tax avoidance behavior.