First of all, two definitions used by economists:

 - Normal goods: these are goods or services that see an increase in demand when incomes rise. Most goods/services are normal goods.

 - Inferior goods: these are goods or services that see a decrease in demand when incomes rise. These goods/services include cheap clothing.

You want to know another normal good? Leisure.
Inferior good? Work.

That means that, as incomes rise, the less you are willing to work harder. People often work harder at lower incomes because they gain more from an increase in incomes than someone already on a higher income. Example:

It's coming up to Christmas, and a firm has seen an unpredicted rise in demand for their good. In order to match this demand, they need to increase output, which means they need to increase labour. The firm approaches two employees about over time, one currently earns £40,000 the other earns £80,000 - both of them are above the upper tax bracket.

The firm says that if the employees do the overtime, that they'll receive a £1,000 bonus at the end of the year. To the guy on £40,000 that represents a 2.5% increase on his wage, to the guy on £80,000 that represents a 1.25% increase on his wage.

Who's going to be more willing to accept the overtime?

And thus, I propose that progressive taxation will keep people working hard as the extra money will mean more to them than at a higher income.

What's more, increased work means increased output in an economy, which will mean that there's an increase in the aggregate supply of all goods and services - resulting in less inflationary pressure, keeping prices down. Also, countries with higher incomes tend to have higher current-account deficits because the increase in wealth means you're more likely to import things (no one in the country is willing to work harder because they have high wages, and so the necessities have to be imported from elsewhere).

And, of course, the increased taxation revenus can lead to increased Government investment to help improve the economic output of an economy. 

You might want to explain what progressive taxation is and how it links to your company bonus analogy.

But, assuming you mean higher tax % at higher incomes, I agree as long as the tax is actually paid on actual effective income. The current system (in almost all countries) fails not in principle but because there is too much opportunity for tax evasion (on the high-end, because they have better accountants) and disproportionate benefits* (on the low-end). In the end it is the middle class (and by that I mean all people earning enough not to receive tax credits) who pay the real tax.

So I support the progressive tax system as long as people resident of the country, regardless of whatever else, if they earn a penny they pay the stated rate for that income bracket on it.

*By this I mean that, below a certain cutoff in the UK you start to receive so many benefits; tax credits; free bus passes etc. that your effective income is much higher than someone earning a few thousand more on paper. Example: my grandparents saved for their retirement and so now cannot receive pension credit or have their council tax paid for them. They are being punished for good financial judgement. A smooth system with no sharp cutoffs or means-testing would stop this; I;'m not proposing scrapping benefits.

Progressive Tax = "Let's take more money from people who earn more just because we can."

@Soleron

Well, how effective the taxation system is (with regards to people avoiding the taxation) isn't a problem of the method, but the Governments who apply it - I agree, greater regulation does need to be put into place.

As for your second point, about people who are on lower wages having a better real income, hasn't this been getting better in some ways over the years? It's become more of a sliding-procedure (ie - you lose your benefits as your income increases), rather than a cut-off point, though, there probably still is some overlap.

Oh, and I personally think that all people should have free access to public transport, but that's for another day.

Yes, thanks for that, because that's the only reason why most countries have a progressive taxation system.

I thought that up to a certain point, people will work MORE if they get a raised salary, because the cost of leisure is going up. Once it reaches a certain magical point, people then start working less and less the more they make because now that they have more money, they are demanding more leisure.

Or something like that?

Well, the thing about these sorts of issues is that there is no true answer, it's mostly all just theory. Some will argue that there is a cut off point (like you are suggesting), others will say that work being a negative good is a sliding point (like I'm suggesting).

Of course, people can find statistics to help prove what they're saying, but, you know "there are lies, damned lies, and then there's statistics". It's one of the reasons why economics is such a widely debated subject.

In other news, I'm dead excited about tomorrow's budget announcement (from a political and economical point of view).

You're very welcome.

^I was originally just going to put that, actually, but then I was worried that my sarcasm wouldn't be well received over the interwebz.

excellent op, and bump,