Quote:
Originally Posted by RickFLM4
1. It was literally suggested by someone a few posts back.
2. At some point making less of each extra dollar isn't worth it. Would it be worth it to make that extra dollar if you were taxed 99% on it? Of course not. Everyone has a point where making a smaller % of each incremental dollar isn't worth it.
Making more and keeping less of the incremental amount still leaves you with more, but the effort to make the incremental portion you keep isn't always worth it.
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A subject close to me heart, that's often misunderstood by taxpayers.
Yes, you reach a point where it's not worth it, but the more gradual you can make it, the less people will work to stay under it. If we had a true sliding scale tax system where you paid slightly more tax for every dollar you earned, there'd be no 'threshold' to manage your money beneath. This would be an ideal system but you need a computer to work out your tax liability. The advantage of the current system is that it can easily be worked out and explained with a pen and paper.
However, many people believe in a system where (i'm making these thresholds and rates up) you pay 20% up to $50k, then 30% from $50k to $80k then 40% from $80k upwards, that you should really try to make $49k or $79k to minimize your bracket. But it doesn't work this way. If you earn $51k, you pay 20% tax on $50k, then $30% tax on $1k.
You're still $700 better off earning $51k than you are earning $49,999.99.
After WWII, the UK had a maximum tax rate of 95%. The beatles wrote a song complaining about it called "taxman".
Most countries these days have a maximum tax rate of 50%, so it's still worth your while working, because you get to keep 50c in every dollar you earn. Also, people who've worked to get themselves into the top tax bracket, generally aren't people who'd be happy then sitting on their arse doing nothing to avoid paying more tax ... they're much more likely to pay an accountant or lawyer to work out how to transfer their income out of that tax jurisdiction and pay higher accounting fees but less tax.
There are some notable exceptions, usually in the form of handouts or credits. For example, low income earners in Australia get cheaper car rego, free dental, subsidized child support, and free public health insurance if you earn less than a particular amount. This means if you earn $1 more than the threshold, you suddenly have to pay for a $2,000 service that you previously got for free.
These sort of thresholds are (economically) poor public policy and do elicit the unwanted effect of incentivizing people to work less.