Friday, September 16, 2011

Three discussions of marginal tax rates, only some get it right.

Firstly a link commenting on a egregious common mistake that the media makes often makes about tax rates.  The following statement from USA Today is clearly wrong:
"That raise actually might not be as good as it looks. The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise."
This commenter shows that within our tax system you always make more money when you get a raise, you just might have a higher marginal tax rate on the extra salary, but you never make less net income.  USA Today fixed it.

An even more complete discussion of marginal tax rates can be found here

All that being said when you add in the rest of the tax code with earned income tax credits, welfare and deductions the net income vs. starting income can be very different at low incomes.  This author seems to think that it provides a disincentive to work, whereas I see it as society's way of providing an income above the poverty line for families until they begin making more than that.  The lowest net income seems to hover around $35 to $40 thousand a year. 


Paul Smith Jr. said...

It is possible that jumping tax brackets can reduce your income if that jump coincides with the expiration of certain credits or deductions. I can't guarantee this is a perfectly correct example, but I'm pretty sure that the child care deduction expires at some income level so someone losing this credit/deduction could end up making less overall.

Richard said...

Paul, I was just addressing marginal tax rates and raises. I do agree that when credits are included you can get the effect you mention and I included a link to just such an analysis. I think that the issue at low income levels is that the tax code is trying not to tax people below a certain level of income and that the other credits are intended to provide/cause/insure a minimum income level.

The case in the USAToday article wasn't directed at one of those cases so the answer and the math was just plain wrong.