4 ms·

Note that because of the way tax brackets work, it is not possible for a small increase in income to increase your taxes to the point that it's a net decrease (

by notjack 11y ago

Note that because of the way tax brackets work, it is not possible for a small increase in income to increase your taxes to the point that it's a net decrease (due to tax brackets anyway). If you're just below the next tax bracket, and you get a ten dollar raise, only those ten dollars are taxed at the higher rate. All of your previous income remains taxed the same as it was before.

Tenhundfeld 11y ago
I wish I could upvote this a thousand times. I don't know where this idea of getting "bumped up a tax bracket" comes from. I occasionally hear it from smart and otherwise informed people. It's easy to dismiss as a wonkish point, but I actually think it's important. Some people think it's unfair for millionaires to be "taxed at a higher rate" when they've "earned their money." I wonder if they would still feel that way if they understood the millionaire is paying the same rate as everybody else for the first $75k, for example. Of course, the truth is the millionaire is probably paying a lower tax rate due to clever accounting and large portion of earnings being subject to capital gains tax instead of income tax. But that's a different topic. Anyway, not trying to make this political. :) I just wish more people understood how tax brackets actually work.
- Ntrails 11y ago
  >Some people think it's unfair for millionaires to be "taxed at a higher rate" when they've "earned their money." I wonder if they would still feel that way if they understood the millionaire is paying the same rate as everybody else for the first $75k, for example. In the UK at least once you go into the 45% super high earner bracket (150k I think) - you'll start to lose your tax free allowance which means you do actually pay more tax on the sub threshold income. Obviously it's still designed to ensure no one ever goes over 100% marginal tax rate (where you'd actually lose money by earning more).
  - Tenhundfeld 11y ago
    Interesting. I should have said "... in the United States." I know very little about taxes in other countries.
  - gchadwick 11y ago
    > In the UK at least once you go into the 45% super high earner bracket (150k I think) The personal allowance decreases by £1 for every £2 you earn over £100k. Combined with the existing income tax this is equivilent to having a marginal rate of 60% on earnings between 100 and 120k.
vidanay 11y ago
That's not how tax brackets work, but it is how some brain-dead payroll systems work! I have seen first hand a broken payroll system that simply extrapolates the current pay period out into the full calendar year and then deducts taxes at that rate. This has the result of a small gross increase (usually due to intermittent overtime pay) resulting in a net decrease in pay for that pay period. This is very much an edge condition of an already broken model, but I have definitely seen it happen.
- noxryan 11y ago
  What you're describing is tax-withholding. In this situation you would receive the extra tax withheld when you file your tax return, so you're not really having extra tax taken from you. You could also always claim more allowances on your W-4.
- repiret 11y ago
  > extrapolates the current pay period out into the full calendar year and then deducts taxes at that rate For US Federal taxes, thats generally how its supposed to work - see [1], and for some exceptions [2]. > small gross increase [...] resulting in a net decrease in pay for that pay period If a payroll system is doing that, its not for the reason you cite. US tax rates are such that an increase in gross pay always results in an increase in net pay, and that doesn't change when you divide gross and net by 24 (or however many pay periods you have each year). [1]: https://www.irs.gov/publications/p15/ar02.html#en_US_2015_publink1000254685 https://www.irs.gov/publications/p15/ar02.html#en_US_2015_pu... [2]: https://www.irs.gov/publications/p15a/ar02.html#en_US_2015_publink1000236700 https://www.irs.gov/publications/p15a/ar02.html#en_US_2015_p...
- aninhumer 11y ago
  My understanding is that this is done so people get consistent monthly payments in the common case. Otherwise people who plan based on their monthly pay at the start of the year might end up in serious difficulty when it suddenly drops. If this results in your being underpaid for whatever reason, it will be corrected at the end of the financial year.
zaroth 11y ago
This is definitely true if you are just looking at income tax. The problem is that's not the only taxes you pay. For example, EITC rebate decreases as well, which additionally erodes any gross increase. GSA has some studies which specifically look at effective tax rate on incremental dollars. There are places in the curve which are nearly 100% marginal. To see dramatically higher than 100% marginal rates, you have to look at the big picture and not just income taxes. There is a bevy of state and federal-supported social programs, the big ones SSDI, Medicaid, SNAP, and ACA, which pay out tremendous sums if you don't work at all, and ratchet down aggressively as you start working. Combined with the higher bracket income-based taxes, you get a curve which looks like a shifted x^3 curve. Namely, as soon as you start working you are heavily negative. Then for a long time working more nets you little to nothing, and then eventually you can pull-out the other side (for a family of 4, that starts around $100k gross household income)
- gjm11 11y ago
  That last statement -- that it takes a household income of ~$100k/year before you "pull out the other side" and end up genuinely better off than you would be earning nothing -- seems extremely surprising. The great majority of households in the US have household income less than $100k. Are you saying that they are all worse off, or only insignificantly better off, than they would be with an income of zero? If so, I'd love to see some data.
  - zaroth 11y ago
    The typical chart looks something like this; http://www.economonitor.com/dolanecon/files/2014/01/P140103-5p.png http://www.economonitor.com/dolanecon/files/2014/01/P140103-... But even that does not include a substantial number of assistance programs, like TANF (up to $10k per year in cash), Section 8, and forget about a proper analysis of progressive income-based-pricing for things like college tuition. Most of all, these analysis always assume the cost of working is $0 when in fact it costs a lot to get to work and be at work all day, as well as the marginal value of not being employed and spending that time doing work you would otherwise pay someone else to do (childcare, housework, home schooling, etc.) is very significant. It also depends heavily on how healthy the family is, and therefore the market value of $0 deductible Medicaid / ACA. GSA pegs the average value of Medicaid around $8,000 but consider the max family out-of-pocket for Bronze ACA without any subsidies is $13,200, and that's not even counting the premiums, so that $8,000 value is assuming a a relatively health family of 4. If the family has chronic health needs, then getting eligible for Medicaid can save upwards of $25,000 per year between premiums and out-of-pocket expenses. Also note, SSDI is ~$48,000/yr for a fully vested disabled individual with 2 children. So I definitely agree if you just look at the tax return the average healthy family of 4 will see net income rising certainly before you hit $100k gross. How much their cost-of-living is increasing in lock-step with that rise, versus how much is eaten by increasing work-related and income-related expenses is a more contentious topic which I have yet to find, even from GSA, a truly comprehensive analysis which includes the effects of the ACA.
dghughes 11y ago
Strange, I'm not familiar with the US system I figured it was similar to Canada's. We have four sections and you get dumped into only one of them although the first $11K is not taxed.

by notjack 11y ago

Tenhundfeld 11y ago

I wish I could upvote this a thousand times. I don't know where this idea of getting "bumped up a tax bracket" comes from. I occasionally hear it from smart and otherwise informed people. It's easy to dismiss as a wonkish point, but I actually think it's important. Some people think it's unfair for millionaires to be "taxed at a higher rate" when they've "earned their money." I wonder if they would still feel that way if they understood the millionaire is paying the same rate as everybody else for the first $75k, for example. Of course, the truth is the millionaire is probably paying a lower tax rate due to clever accounting and large portion of earnings being subject to capital gains tax instead of income tax. But that's a different topic. Anyway, not trying to make this political. :) I just wish more people understood how tax brackets actually work.

Ntrails 11y ago
>Some people think it's unfair for millionaires to be "taxed at a higher rate" when they've "earned their money." I wonder if they would still feel that way if they understood the millionaire is paying the same rate as everybody else for the first $75k, for example. In the UK at least once you go into the 45% super high earner bracket (150k I think) - you'll start to lose your tax free allowance which means you do actually pay more tax on the sub threshold income. Obviously it's still designed to ensure no one ever goes over 100% marginal tax rate (where you'd actually lose money by earning more).
- Tenhundfeld 11y ago
  Interesting. I should have said "... in the United States." I know very little about taxes in other countries.
- gchadwick 11y ago
  > In the UK at least once you go into the 45% super high earner bracket (150k I think) The personal allowance decreases by £1 for every £2 you earn over £100k. Combined with the existing income tax this is equivilent to having a marginal rate of 60% on earnings between 100 and 120k.

vidanay 11y ago

That's not how tax brackets work, but it is how some brain-dead payroll systems work! I have seen first hand a broken payroll system that simply extrapolates the current pay period out into the full calendar year and then deducts taxes at that rate. This has the result of a small gross increase (usually due to intermittent overtime pay) resulting in a net decrease in pay for that pay period. This is very much an edge condition of an already broken model, but I have definitely seen it happen.

noxryan 11y ago
What you're describing is tax-withholding. In this situation you would receive the extra tax withheld when you file your tax return, so you're not really having extra tax taken from you. You could also always claim more allowances on your W-4.
repiret 11y ago
> extrapolates the current pay period out into the full calendar year and then deducts taxes at that rate For US Federal taxes, thats generally how its supposed to work - see [1], and for some exceptions [2]. > small gross increase [...] resulting in a net decrease in pay for that pay period If a payroll system is doing that, its not for the reason you cite. US tax rates are such that an increase in gross pay always results in an increase in net pay, and that doesn't change when you divide gross and net by 24 (or however many pay periods you have each year). [1]: https://www.irs.gov/publications/p15/ar02.html#en_US_2015_publink1000254685 https://www.irs.gov/publications/p15/ar02.html#en_US_2015_pu... [2]: https://www.irs.gov/publications/p15a/ar02.html#en_US_2015_publink1000236700 https://www.irs.gov/publications/p15a/ar02.html#en_US_2015_p...
aninhumer 11y ago
My understanding is that this is done so people get consistent monthly payments in the common case. Otherwise people who plan based on their monthly pay at the start of the year might end up in serious difficulty when it suddenly drops. If this results in your being underpaid for whatever reason, it will be corrected at the end of the financial year.

zaroth 11y ago

This is definitely true if you are just looking at income tax. The problem is that's not the only taxes you pay. For example, EITC rebate decreases as well, which additionally erodes any gross increase. GSA has some studies which specifically look at effective tax rate on incremental dollars. There are places in the curve which are nearly 100% marginal. To see dramatically higher than 100% marginal rates, you have to look at the big picture and not just income taxes. There is a bevy of state and federal-supported social programs, the big ones SSDI, Medicaid, SNAP, and ACA, which pay out tremendous sums if you don't work at all, and ratchet down aggressively as you start working. Combined with the higher bracket income-based taxes, you get a curve which looks like a shifted x^3 curve. Namely, as soon as you start working you are heavily negative. Then for a long time working more nets you little to nothing, and then eventually you can pull-out the other side (for a family of 4, that starts around $100k gross household income)

gjm11 11y ago
That last statement -- that it takes a household income of ~$100k/year before you "pull out the other side" and end up genuinely better off than you would be earning nothing -- seems extremely surprising. The great majority of households in the US have household income less than $100k. Are you saying that they are all worse off, or only insignificantly better off, than they would be with an income of zero? If so, I'd love to see some data.
- zaroth 11y ago
  The typical chart looks something like this; http://www.economonitor.com/dolanecon/files/2014/01/P140103-5p.png http://www.economonitor.com/dolanecon/files/2014/01/P140103-... But even that does not include a substantial number of assistance programs, like TANF (up to $10k per year in cash), Section 8, and forget about a proper analysis of progressive income-based-pricing for things like college tuition. Most of all, these analysis always assume the cost of working is $0 when in fact it costs a lot to get to work and be at work all day, as well as the marginal value of not being employed and spending that time doing work you would otherwise pay someone else to do (childcare, housework, home schooling, etc.) is very significant. It also depends heavily on how healthy the family is, and therefore the market value of $0 deductible Medicaid / ACA. GSA pegs the average value of Medicaid around $8,000 but consider the max family out-of-pocket for Bronze ACA without any subsidies is $13,200, and that's not even counting the premiums, so that $8,000 value is assuming a a relatively health family of 4. If the family has chronic health needs, then getting eligible for Medicaid can save upwards of $25,000 per year between premiums and out-of-pocket expenses. Also note, SSDI is ~$48,000/yr for a fully vested disabled individual with 2 children. So I definitely agree if you just look at the tax return the average healthy family of 4 will see net income rising certainly before you hit $100k gross. How much their cost-of-living is increasing in lock-step with that rise, versus how much is eaten by increasing work-related and income-related expenses is a more contentious topic which I have yet to find, even from GSA, a truly comprehensive analysis which includes the effects of the ACA.

dghughes 11y ago

Strange, I'm not familiar with the US system I figured it was similar to Canada's. We have four sections and you get dumped into only one of them although the first $11K is not taxed.