Americans in ten states currently pay top tax rates above 49 percent, which is likely above the revenue‐maximizing tax rate. Under President Biden’s proposed tax increases, almost three‐quarters of the states would face top combined federal, state, and local tax rates above 49 percent. 

Tax rates affect people’s decisions about how much to work and invest. The effects are often greatest for the highest‐income individuals because they are able to change their behavior the most.

Under the progressive tax rate system, additional income earned over certain income thresholds is subject to higher tax rates, ranging from 10 percent to 37 percent. The highest‐paid Americans are charged a federal marginal income tax rate of 37 percent on each dollar earned above $731,200 (married) in 2024. The average top rate increases to 46 percent after factoring in state, local, and Medicare taxes.

When the government takes close to half of each additional dollar earned, it changes an individual’s decisions about how much to work and what type of work to do. There are at least four ways high tax rates decrease economic activity.