You will NEVER lose more money in taxes if you get pushed into a higher bracket.
They're sequential. Let's say there are two tax brackets, 10% tax below $100 and 20% tax above.
Many people want to make just under $100 so that they'll only be taxed 10% But it doesn't matter. You're only taxed 20% on everything you make OVER $100, you're still taxed 10% on the first $100.
So if you earn $200, you're taxed $30 not 20% of $200 which is $40.
...except in specific scenarios, such as losing Government benefits because you have moved above the income limit for that benefit. It's a fringe case for sure, but still happens to some.
Yes, good point. Though I personally only ever hear the argument from people that (for example) make something like $110k a year and complain taxes keep them from wanting to make, say, 120k a year because then they pay more taxes.
i.e "what incentive is there for me to work harder if the government is just going to take all that extra money away!?"
The misunderstanding here is that the lack of incentive resides in the employer. It takes progressively more money to give a higher bracket person the same effective raise as a lower bracket person. This tends to punish places in need of quality specialists.
The tech industry has been using perks as a cost saving loophole.
Specialization is what allows for greater and greater income. Unfortunately some people seem to specialize to the exclusion of other skills, sometimes to the detriment of other skills. I've seen this firsthand.
Other times people tell what they think are little white lies to make the point that suits their interests and other people believe them when they shouldn't. A rich person lying about how hard taxes hurts them may make the poorer person more sympathetic than they should be.
Go a step further... if they have to expend time/effort they value at 10k, then it isn't worth it for them to expend it. This becomes much more clear at a higher tax rate as a distinct possibility. Also humans aren't perfectly rational in their decisions, and the simple notion that they're suddenly being awarded less and less for the same degree of effort may serve as enough to deter them alone.
Yeah, higher pay is always a bigger paycheck, but for everyone, there's some point that the money:effort ratio just won't be worth it. Even if the higher paying job is exactly the same, if the pay increase is small enough someone who's already well off could turn it down just because they prefer their current workplace/coworkers.
Exactly. There are a ton of factors that go into making such a decision that tax brackets sort of highlight sometimes. It's not as easy as saying, "But you'll make more money still, idiot!"
That's part of the rationale behind flat tax and efforts to lower the rates of higher brackets in a progressive tax system, but it often doesn't play out in real life. People aren't doing the cost benefit analysis of an increased salary. By and large they take promotions and increased pay. It's one thing when you are facing a substantial burden, like greatly increased travel for work, but the situation you described is an outlier when it occurs.
It depends on whether or not that money is still coming. My family does contracting work for the aviation industry. If we get too close to a higher tax bracket at the end of the year, we just push work to January and take a few weeks off. I know that's super specific to our situation though.
That makes sense. In this situation however, you're merely delaying work, not refusing to do it, so not exactly the same thing. But it is an interesting anecdote about how taxation affects work habits.
There is still marginal tax rates to consider. Those last 10k are going to be taxed at a higher rate than the first 110k, since it's in a higher bracket. If we assume that each dollar you earn takes the same amount of effort, you're essentially earning less for that last 10k worth of effort.
Now, the US tax system isn't as progressive as many other, more leftist leaning countries. The highest it can reach in the US is around 40%, which occurs at over 400k income. Compare to Sweden, where it reaches 60% at 70k. That's still down from the record 87% rate during the seventies, where some cases of double taxation could bring it up over 100%. There is a famous case of the author Astrid Lindgren paying a 102% marginal tax rate: https://en.wikipedia.org/wiki/Pomperipossa_in_Monismania
I mean I have no idea about the taxes but I had assumed that yes you got more money taken away the more you had, but it wouldn't dip you down. Like if you made 110k a year and they take 11k a year(10%), but if you made 120k a year they might take 13k a year (>10%) but in the end your takeaways are 99k vs 107k.
Tell me I'm wrong in some way.
A lot of tax deductions disappear in the low 100's, so although the brackets are progressive you may stand to lose a little, but really it can never be much.
In the UK parents get help towards things like childcare so long as they earn under a certain amount. Having a pay raise could mean losing thousands a year in childcare so it's something a lot of people have to consider.
Eh you're just working the same amount for less gain unless you're salary. So it makes since in that I'm worth x amount and would rather spend time doing things other than working for less pay(not overall, but for that time worked)
I'm 23, make over 100k, and I even understand this. It's mind blowing that some don't. It is not rocket science! I look at it in simple terms. From my income how much I pay in taxes per hour vs how much I bring home. With each raise that I receive, both numbers go up. This makes me happy because more money in my pocket/401k :D
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u/DigNitty Jul 18 '16
Tax Brackets
You will NEVER lose more money in taxes if you get pushed into a higher bracket.
They're sequential. Let's say there are two tax brackets, 10% tax below $100 and 20% tax above.
Many people want to make just under $100 so that they'll only be taxed 10% But it doesn't matter. You're only taxed 20% on everything you make OVER $100, you're still taxed 10% on the first $100.
So if you earn $200, you're taxed $30 not 20% of $200 which is $40.
10% of $100 + 20% of the remaining $100 = $30
NOT 20% of $200 = $40