DISINCENTIVES

A disincentive causes certain actions or activities to not be profitable, thereby decreasing motivation to carry them out. Typical disincentives in the United States revolve around the income tax structure. Income taxes cause work disincentives. With marginal rates of tax, people have less incentive to earn more dollars because they will have to pay more of it in taxes. Although few people choose the poverty of unemployment to avoid paying income taxes, some evidence indicates people may decide not to work overtime or take a second job. Married women may prefer not to work outside the home. Research shows that work disincentives are not strong influences for the majority of taxpayers. In fact, data indicate that many low and middle income groups, trying to meet their family budgets, work longer hours so their net income will be higher.

Effects of tax disincentives most often appear at very high income levels and at very low levels. At the highest levels those subject to the highest marginal tax rates may increase their leisure time rather than work to earn more. At the lowest levels individuals may fall into a poverty trap. Certain benefits paid by the government such as free school lunches for children, medical care, or supplemental income, will be reduced or not paid at all if a person reaches a certain income level. Individuals will choose to not work or work only enough so that their income stays at a very low level.

The tax system creates disincentives to save. Savings are an important source of funds for investment in the United States. Interest earned on savings accounts must be declared to the Internal Revenue Service each April when filing taxes. A family's gross adjusted income is raised by interest on savings, increasing their tax bill. Reporting interest income therefore acts as a disincentive to save.

Economists also look at the home mortgage deduction allowed as a disincentive to save. The yearly home mortgage interest deduction represents large tax savings to families. This tax saving encourages them to go into debt, the opposite of saving, for the purchase of large homes. If this deduction were eliminated, people would demand smaller houses to save more of their income. Less money would be invested in housing, making more funds available for lending to other industries.

See also: Incentive, Mortgage, Profit, Savings