A real-world example shows taxes eat into marginal income, steering workers toward lower-paying, but more pleasant, jobs.
Could income taxes ever encourage someone to switch from a higher-paying to a lower-paying job? Perhaps surprisingly, the answer is yes. I have a recent example of this in my own family.
The marginal nature of the United States’ progressive income tax is supposed to prevent this outcome. You pay a higher tax rate only on income you earn above a certain level, not your entire income. For example, a married couple earning $600,000 a year would pay 10 percent on the first $24,000 they make, 12 percent on the $73,000 they earn between $24,000 and $97,000, and so on, up until they pay 35 percent on the $99,000 they earn above the $501,000 threshold. (Bracket figures are rounded to the nearest thousand.)
What matters when you’re considering a new income source is the tax you will pay on that additional income. If a new job would pay $50,000 more and you’re already making $600,000 as a married couple, then the job is really only paying you, after tax, $32,500 more.
And that difference between pre-tax and post-tax pay could make all the difference when deciding on a job that pays more but is less fulfilling or enjoyable. High marginal tax rates discourage productive, paid labor.
...read more at thedailyeconomy.org
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I think this is most relevant for dual income households. The net benefit from the secondary earner, compared to doing unpaid housework, is often very low. In those cases, you may as well not be miserable, while adding very little to the household's purchasing power.
Depends on the math and how it works from one scenario to the next. Most people change how they spend money and what they keep as tax deferred etc. though when facing a higher tax bracket. For example, if I got a pay raise that put me in a new bracket, I would just dump the money in a 401K or Traditional IRA, avoiding the tax bracket because my taxable income would stay at the lower limit. Then, when I do withdraw from the retirement tool in later years, I'm earning far less, so it gets taxed less in an even lower tax bracket.