7 ms·

Dunno about the US, but in the UK there are a few wage points where a small rise can lead to a reduction in net income. Specifically moving into the higher tax

Dunno about the US, but in the UK there are a few wage points where a small rise can lead to a reduction in net income. Specifically moving into the higher tax bracket, which removes £200 off their personal allowance if they were using the pooling allowance option -- i.e. a £100 tax rise could lead to £46 extra income but £201 extra outgoing, a net reduction of £155 There are more perverse options with housing, childcare and income benefits being removed which I believe can lead to a negative income. In the US the Benefit Cliff is real: "There is this issue of the benefits cliffs, where some programs are designed so just a very marginal increase in earnings can result in a loss of a very important benefit. And a lot of states, unfortunately, have structured their childcare subsidies programs that way," explains Skinner. "Typically, pay rises, income rises, but at some point you lose eligibility for a subsidies all together and it's an abrupt reduction in that family's resources," Skinner says. https://www.theguardian.com/money/2014/jul/20/benefits-cliff-minimum-wage-increase-backfire-poverty https://www.theguardian.com/money/2014/jul/20/benefits-cliff...

sobani 7y ago
This picture show the benefit cliffs in a very clear way: https://sacredcowchips.files.wordpress.com/2015/08/welfare-cliff.jpg https://sacredcowchips.files.wordpress.com/2015/08/welfare-c... Most important part of that picture: "The single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income & benefits of $57,045."
- iso1210 7y ago
  That's shocking - so much for "one specific demographic", when it affects people earning over twice the median wage.
magduf 7y ago
Does the US not have marginal tax brackets? That seems really odd and dumb. The benefit cliff you cite is real, but for actual income taxes, there's no such thing as a reduction in income from higher earnings. Going to a higher tax bracket just means you pay higher taxes on money over a certain threshold. So if bracket A is 20% under $50k, and bracket B is 30% over $50k, if you make $51k, you'll pay 20% of 50k, plus 30% of 1k. It's never disadvantageous to make more money (except if you're on government benefits as mentioned, where there are some weird effects). Strangely, a lot of people don't understand this at all.
- chromaton 7y ago
  In addition to the benefits stuff listed here, you can also go backwards on income due to the Earned Income Tax Credit cutoff.
- aw1621107 7y ago
  As far as I know, the US tax system works the way you describe.
- BlargMcLarg 7y ago
  The Netherlands has this issue as well, points of income where your marginal gain is negative, ergo losing net money when making more gross money due to losing benefits. There are also indirect problems such as losing access to certain services (cheaper housing being one). Obviously, this shouldn't be the case. Making more money gross should result in equal-or-more money net, without disadvantages, otherwise the incentive is gone.
  - sobani 7y ago
    The first table (image) in this post https://gathering.tweakers.net/forum/list_messages/1735517 https://gathering.tweakers.net/forum/list_messages/1735517 shows this issue. It's in Dutch, but the most important columns are the first (gross income), the second to last (net income, including benefits) and the last (effective tax rate on the 1000 gross income increase). Note the last column tells us that making 1000 gross extra will increase your net income about 100 between 32K and 31K gross income. Going from 31K to 32K will even make you lose money.
- the_watcher 7y ago
  Marginal tax brackets yes, but there are also benefits that you lose access to based on income. The linked article is about food stamps, but imagine something like subsidized health insurance for people making under $50,000. Going from $49,999 to $50,0000 is much more costly than the taxes you paid on that dollar.
- kevstev 7y ago
  There are special benefits provided for those under low incomes in many jurisdictions. If you go from $24,999 to $25,000 you may see some supplemental food income benefits go from $400 a month to $200 a month (not an actual example- but you get the idea). Generally though, these cases are not common and are really overstated as a problem IMHO. They also tend to overlook that its far more beneficial to take the raise and whatever temporary setback that might come with it to move yourself up the wage scales. Why it comes up in these discussions as something meaningful always confuses me. To me its akin to explaining to someone that squirrels are not harmful to humans and we should not walk around terrified of them and having someone come by and say "but actually, they could have rabies...." I mean, you aren't wrong, but you are essentially spreading misinformation by implying that this is common instead of exceedingly rare and something people should be wary of as they walk down the street every day. Its the exact type of misinformation that politicians use to make disingenuous arguments to steer people into supporting their policies, and the HN crowd should be above that IMHO.
arkades 7y ago
The benefit cliff affects one demographic, and while affecting net revenues, isn't a tax issue. Software engineers fretting about moving into a higher tax bracket is another demographic, and is a tax issue. These are different phenomena, generally affecting different people. While (a hypothetical I) could certainly lose out his social security medicaid by going from $0 income to non-0$ income, I'm not the person worried about going from the <80k$ bracket to the >80k$ bracket. IME, the people who worry about making more money and moving into a new tax bracket are not people who are eligible for any meaningful subsidies to begin with.
AdmiralGinge 7y ago
I've always been a bit sceptical of things like a citizen's income, but a negative income tax instead of things like universal credit seems to be quite an elegant solution to dealing with benefit cliffs.

sobani 7y ago

This picture show the benefit cliffs in a very clear way: https://sacredcowchips.files.wordpress.com/2015/08/welfare-cliff.jpg https://sacredcowchips.files.wordpress.com/2015/08/welfare-c... Most important part of that picture: "The single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income & benefits of $57,045."

iso1210 7y ago
That's shocking - so much for "one specific demographic", when it affects people earning over twice the median wage.

magduf 7y ago

Does the US not have marginal tax brackets? That seems really odd and dumb. The benefit cliff you cite is real, but for actual income taxes, there's no such thing as a reduction in income from higher earnings. Going to a higher tax bracket just means you pay higher taxes on money over a certain threshold. So if bracket A is 20% under $50k, and bracket B is 30% over $50k, if you make $51k, you'll pay 20% of 50k, plus 30% of 1k. It's never disadvantageous to make more money (except if you're on government benefits as mentioned, where there are some weird effects). Strangely, a lot of people don't understand this at all.

chromaton 7y ago
In addition to the benefits stuff listed here, you can also go backwards on income due to the Earned Income Tax Credit cutoff.
aw1621107 7y ago
As far as I know, the US tax system works the way you describe.
BlargMcLarg 7y ago
The Netherlands has this issue as well, points of income where your marginal gain is negative, ergo losing net money when making more gross money due to losing benefits. There are also indirect problems such as losing access to certain services (cheaper housing being one). Obviously, this shouldn't be the case. Making more money gross should result in equal-or-more money net, without disadvantages, otherwise the incentive is gone.
- sobani 7y ago
  The first table (image) in this post https://gathering.tweakers.net/forum/list_messages/1735517 https://gathering.tweakers.net/forum/list_messages/1735517 shows this issue. It's in Dutch, but the most important columns are the first (gross income), the second to last (net income, including benefits) and the last (effective tax rate on the 1000 gross income increase). Note the last column tells us that making 1000 gross extra will increase your net income about 100 between 32K and 31K gross income. Going from 31K to 32K will even make you lose money.
the_watcher 7y ago
Marginal tax brackets yes, but there are also benefits that you lose access to based on income. The linked article is about food stamps, but imagine something like subsidized health insurance for people making under $50,000. Going from $49,999 to $50,0000 is much more costly than the taxes you paid on that dollar.
kevstev 7y ago
There are special benefits provided for those under low incomes in many jurisdictions. If you go from $24,999 to $25,000 you may see some supplemental food income benefits go from $400 a month to $200 a month (not an actual example- but you get the idea). Generally though, these cases are not common and are really overstated as a problem IMHO. They also tend to overlook that its far more beneficial to take the raise and whatever temporary setback that might come with it to move yourself up the wage scales. Why it comes up in these discussions as something meaningful always confuses me. To me its akin to explaining to someone that squirrels are not harmful to humans and we should not walk around terrified of them and having someone come by and say "but actually, they could have rabies...." I mean, you aren't wrong, but you are essentially spreading misinformation by implying that this is common instead of exceedingly rare and something people should be wary of as they walk down the street every day. Its the exact type of misinformation that politicians use to make disingenuous arguments to steer people into supporting their policies, and the HN crowd should be above that IMHO.

arkades 7y ago

The benefit cliff affects one demographic, and while affecting net revenues, isn't a tax issue. Software engineers fretting about moving into a higher tax bracket is another demographic, and is a tax issue. These are different phenomena, generally affecting different people. While (a hypothetical I) could certainly lose out his social security medicaid by going from $0 income to non-0$ income, I'm not the person worried about going from the <80k$ bracket to the >80k$ bracket. IME, the people who worry about making more money and moving into a new tax bracket are not people who are eligible for any meaningful subsidies to begin with.

AdmiralGinge 7y ago

I've always been a bit sceptical of things like a citizen's income, but a negative income tax instead of things like universal credit seems to be quite an elegant solution to dealing with benefit cliffs.