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There is no tax rate < 100% that discourages a higher income.

by aqme28 14y ago

jacques_chester 14y ago
For some people there is. It's a marginal effect. Every time you alter the tax rate, some fraction of earners will change their behaviour.
smsm42 14y ago
There is. Living in California, marginal rates for a well-paid engineer can be 50% and more. Given that you give up half of the money, one's incentive to look for a side gigs and other supplemental income is significantly reduced. Of course, nobody turned down a raise saying "oh, taxes are high so I don't need it", but if additional income involves substantial marginal effort and risk, given high marginal tax it's just not worth it.
- prostoalex 14y ago
  Yep. And if your investment portfolio generates reasonable before-tax return (it should, if you've been working for the past 5+ years and saving diligently), then you get to the marginal rate even quicker.
  - smsm42 14y ago
    Not to mention increase in paperwork once you go beyond simple salary...
baddox 14y ago
How do you figure? If I have the choice of increasing my labor by 20% (by some arbitrary metric, like labor hours per week) to increase my post-tax income by 20%, I might decide that is worth it and go for the higher income. If, on the other hand, I am currently at the top end of my current tax bracket, and the next highest bracket means that my 20% increase in labor will only increase my post-tax income by 10%, I might decide that isn't worth it and thus not go for the higher income.
- jacquesgt 14y ago
  But, with the higher tax rate, someone else might decide it's worth it to increase their labor by 40% so as to increase their post-tax income by 20%, whereas they only would have increased their labor by 20% without the tax effect. So, it really isn't clear that higher taxes lead to lower amounts of labor.
  - prostoalex 14y ago
    Except that someone will be hitting the external limitations (only 24 hours in a day, human body needs non-billable hours for sleep and food) pretty quickly. Also, this is true as long as there are no opportunity cost alternatives (spending time with family, pursuing hobby). In a nutshell, "High top marginal personal income tax rates are found to impede long-run productivity". Source on this is OECD, but original PDF link no longer works http://www.cato.org/blog/oecd-admits-high-personal-corporate-tax-rates-hurt-prosperity http://www.cato.org/blog/oecd-admits-high-personal-corporate...
- glenjamin 14y ago
  This assumes a linear correlation between labour spent and gross income earned. The tax brackets are known to everyone, including those who pay the salaries - if you want to get someone to do that 20% extra work, and they'll want a 20% increase in net pay, then you can just do the math and pay the appropriate gross.
jacoblyles 14y ago
Have you heard of the "dead weight loss" of taxation? It's a concept in economics.

There is no tax rate < 100% that discourages a higher income.

by aqme28 14y ago

There is no tax rate < 100% that discourages a higher income.

For some people there is. It's a marginal effect. Every time you alter the tax rate, some fraction of earners will change their behaviour.

smsm42 14y ago

There is. Living in California, marginal rates for a well-paid engineer can be 50% and more. Given that you give up half of the money, one's incentive to look for a side gigs and other supplemental income is significantly reduced. Of course, nobody turned down a raise saying "oh, taxes are high so I don't need it", but if additional income involves substantial marginal effort and risk, given high marginal tax it's just not worth it.

prostoalex 14y ago
Yep. And if your investment portfolio generates reasonable before-tax return (it should, if you've been working for the past 5+ years and saving diligently), then you get to the marginal rate even quicker.
- smsm42 14y ago
  Not to mention increase in paperwork once you go beyond simple salary...

baddox 14y ago

How do you figure? If I have the choice of increasing my labor by 20% (by some arbitrary metric, like labor hours per week) to increase my post-tax income by 20%, I might decide that is worth it and go for the higher income. If, on the other hand, I am currently at the top end of my current tax bracket, and the next highest bracket means that my 20% increase in labor will only increase my post-tax income by 10%, I might decide that isn't worth it and thus not go for the higher income.

jacquesgt 14y ago
But, with the higher tax rate, someone else might decide it's worth it to increase their labor by 40% so as to increase their post-tax income by 20%, whereas they only would have increased their labor by 20% without the tax effect. So, it really isn't clear that higher taxes lead to lower amounts of labor.
- prostoalex 14y ago
  Except that someone will be hitting the external limitations (only 24 hours in a day, human body needs non-billable hours for sleep and food) pretty quickly. Also, this is true as long as there are no opportunity cost alternatives (spending time with family, pursuing hobby). In a nutshell, "High top marginal personal income tax rates are found to impede long-run productivity". Source on this is OECD, but original PDF link no longer works http://www.cato.org/blog/oecd-admits-high-personal-corporate-tax-rates-hurt-prosperity http://www.cato.org/blog/oecd-admits-high-personal-corporate...
glenjamin 14y ago
This assumes a linear correlation between labour spent and gross income earned. The tax brackets are known to everyone, including those who pay the salaries - if you want to get someone to do that 20% extra work, and they'll want a 20% increase in net pay, then you can just do the math and pay the appropriate gross.

jacoblyles 14y ago

Have you heard of the "dead weight loss" of taxation? It's a concept in economics.