One of the most distinctive aspects of the federal tax system in the U.S. is that it's a progressive system, in which people with lower incomes generally pay tax at lower rates, while those making more money find themselves in higher tax brackets. With some of the tax incentives that exist, such as the earned income credit, it's even possible for some people to end up getting money back from the government.

However, some tax laws actually create pockets of higher tax rates even at low levels of income. This can actually deter some people from increasing their income, because higher earnings create a disproportionate increase in their tax liability. This can have the opposite effect of what the law was trying to accomplish.

Earned income credit
The earned income credit (EIC) provides low-income families with a credit against their tax liability. In many circumstances, taxpayers can even get money back from the government if the amount of their credit exceeds the amount of tax they owe. Parents with two or more children can get as much as $4,500 with the earned income credit.

The credit is subject to income limitations and begins to phase out above them. Because the phase-out reduces the amount of the credit, the effect of the phase-out is similar to a tax on earnings. For instance, for a married couple with two children earning $17,000, the marginal tax from additional earnings is about 21%. To put the rate in perspective, the marginal rate for a couple making $60,000 is just 15%.

Social Security
Many retirees also face the prospect of high marginal tax rates on their income. This results from two things. First, working retirees who receive Social Security before they reach full retirement age face the loss of part or all of their benefits if they earn more than a certain amount of income. Under current law, for every $2 that retirees earn from work, their benefit will be reduced by $1, which is equivalent to a tax of 50%. Second, up to 85% of Social Security benefits themselves are subject to tax if a person earns above a certain amount.

When you combine these two effects, some retirees lose almost all of the extra income they make from working while retired. This greatly reduces their incentive to work. With companies like U.S. Steel (NYSE:X) and Northrop Grumman (NYSE:NOC) fearing prospective labor shortages of skilled workers in the face of an aging workforce nearing retirement, that's a disincentive that the economy can't afford to have.

Quirks of tax law
Unusual pockets of high tax rates have existed for a long time in many different areas. Actually, some of the problems are less severe than they once were. For instance, the earned income credit problem used to be much worse, with rates as high as 36%. An increase in the child tax credit, however, reduced the impact of the EIC phase-out.

It's unlikely that Congress will correct all the idiosyncrasies in the tax laws. Those affecting low-income taxpayers and seniors, however, deserve closer attention. When the tax laws give people in need a good reason not to earn more money, it makes sense to fix the problem.

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Fool contributor Dan Caplinger is reasonably happy with his 25% marginal tax rate. He doesn't own shares of the companies mentioned in this article. The Fool has a disclosure policy.