We often hear economists talking about "incentives", but many of us do not stop to think what they mean by this term. It's simple really, an incentive is just a reason to do something. That's it. It does not even have to be a financial incentive. You have incentive not to steal because you know you will go to jail. You have incentive not to go to jail because jail is bad (guess incentives are transitive just like everything else in Economics). Jails have incentive to be bad places because society does not want many people to go there. And so on...

When we talk about, for example, government programs altering incentives, this is what we mean.

A good example is welfare. It is claimed that welfare reduces the incentive to work, since welfare allows people to consume a minimum level of goods without having to do work. Or, you could say progressive income taxes reduce the incentive to become wealthy since you will not be receiving as much money per dollar of profit generated as you become wealthier.

The reality is that people do respond to incentives. The important question is whether or not the benefits of the government programs proposed are worth altering incentives, in the form of higher taxes and social programs, for.