How Income Tax Rates Affect the Marginal Cost of Job Creation

An employer's marginal income tax rate influences his or her incentives for hiring new employees.

Our Universe Alternate Universe
Marginal Tax Rate of Joe's Employer 25% 75%
Joe Gets a Raise 5,000 5,000
Additional cost of Joe's raise to Employer after tax 3,750 1,250
New Employee Salary 50,000 50,000
New Employee Payroll taxes 15,000 15,000
New Employee Equipment & Real Estate 35,000 35,000
Total Pre-tax cost of New Employee for one year 100,000 100,000
Total After-tax cost of New Employee for one year 75,000 25,000

Lower Tax Rates Apply to Highest Incomes

US taxpayers with incomes greater than $10 million and corporations pay income tax at a lower rate than persons with incomes between $500,000 and $10 million.