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I really don't understand the attitude that people have relating to their income and tax bracket.
In a recent thread a contributor indicates they don't want to increase their income if it raised their marginal tax rate,I can sort of understand not wanting to work harder doing physicaL LABOR OR WORKING MORE HOURS and have the govt take more money from you but when it comes to investing I don't get it.If the govt takes a bigger share but you make and take home more money are you not better off?
I think of net income in terms of total return. Investment gains are often part of taxable income. Marginal tax brackets do increase the drag on total return or better said marginal tax brackets diminish total return.
Most of us need a certain income to afford our life style. Recent data shows that ninety percent of income earners spend more than 100% of their earning so they need to take on additional debt as a means of affording their lifestyle. That math doesn't work.
To your second point: I remember having a conversation with a colleague who couldn't understand why I chose to retire early. My point to him was that he was working for the difference between what he would make (his work income) and what he would receive in retirement (pension income). I further pointed out that he could go elsewhere and work another full time or part time job making his total return (net taxes) much higher. Obviously by staying with his job he was adding years of service to his pension making his eventual pension income higher.
I consider taxes with regard to tax loss harvesting, Roth conversions, and potential qualifications for various benefits (HSA contributions, ACA Insurance subsidies, etc)
Taxes and tax brackets do have many nuisances (tax rules) beyond the marginal taxes brackets. I have always thought a simple flat tax would level the playing field.
@jerry, I have posted more than once how long ago my smiling parents informed little me that the whole point of working and saving and investing was to pay as much tax as possible --- since that meant ... Guess what?
If I am making more money I expect to be paying more taxes. I can think of far worse things to worry about in the prime of my career than whether I'm bumped into a higher tax bracket this year or not. Being debt-free, living within my means, and not being flamboyant with my money goes a long way to retirement savings, even if I might take an income hit at some point down the road if/when I retire from the uni.
Sure, I try to offset cap gains/losses year-to-year, but I find that more about prudent investing than tax planning per se. Besides, it's kind of fun.
Retirees on Social Security and Medicare also have an incentive to limit their income (or at least watch it very closely). The Medicare premium brackets are tied to income. Go one dollar over an IRMAA threshold and a married couple could pay $2500 in extra Medicare tax two years hence. David
In a recent thread a contributor indicates they don't want to increase their income if it raised their marginal tax rate,I can sort of understand not wanting to work harder doing physicaL LABOR OR WORKING MORE HOURS and have the govt take more money from you but when it comes to investing I don't get it.If the govt takes a bigger share but you make and take home more money are you not better off?
......I'll chime in: we are in a hybrid situation. I'm retired, wife still works. Personal circumstances matter a lot. We could not live HERE in the 50th State without: a) giving up some privacy b) effectively getting a subsidy from extended family, who live with us. Rent, food. gas. We share all of that.
We don't want to bump ourselves into a higher tax bracket. For several years, on our tax returns, we have come out OWING ZERO TAX. If we had not very much more income to report, it might negatively affect our ability to even do the little bit of investing we do, for heirs as well as for ourselves. And the dividends and capital gains we get are non-taxable for us, in the lowest bracket.
We've paid-in for years and years. It's time the rules worked to OUR advantage, rather than the billionaires and millionaires: every bit of ALL of my earnings have always been subject to Soc. Tax. For them? They pay-in only until their income reaches the legal upper limit. These days, it's something like $127,000. (Hey, politicians! REMOVE THE CAP!) The crisis with SS is manufactured.
I do not understand why folks think that past a bracket point their taxes will leap in a stair step fashion. In fact the tax you pay advances smoothly along with taxable income. You can verify this by looking at the tax tables. For example, for one who is married filing jointly, there is a bracket change at $78,950. Just below this, your overall rate is 11.5%. Just above this, your rate is 11.51%. So why does everyone get tied up in knots about tax brackets? I must be missing something?
Your job pays you $10 per hour. Today you get the great news that your boss is bumping your wage up to $14 per hour. (Congratulations!) At the new wage, do you want to work more hours or fewer hours each week?
If you answered that you'd work more, then you'd likewise work less if we reversed the question: What would you do if your net pay dropped from $14 to $10/hr? That is another way of observing that you'd work less if your $14/hr were taxed at 28% (netting $10/hr) than if you weren't taxed at all.
Right off the bat, we can ignore graduated taxes. Consider just a flat tax rate. If you're taxed at some fixed rate, you're leaning toward working fewer hours because of the tax. Now raise the flat tax rate. You're even less inclined to work long hours.
A graduated tax rate has almost nothing to do with this propensity. The only effect it has is that as your wages go up, your tax rate goes up, amplifying the effect. But your reluctance to work more hours exists regardless of whether the tax rate is progressive.
Here's the trick in the original question: There is no correct answer. Different people will respond differently. Some people will choose to work fewer hours if they can make the same money, while others will choose to work more hours because they are being paid well for those extra hours.
The exact question above was part of a quick survey given in the labor economics class I'm currently taking. FWIW, the class polled 1/3 for fewer hours, 2/3 for more hours.
That helps to illustrate the somewhat obvious fact that higher wages will increase labor supply in the aggregate, even though some people will choose to work less.
@msf "A graduated tax rate has almost nothing to do with this propensity. The only effect it has is that as your wages go up, your tax rate goes up, amplifying the effect..."
The tendency of some people to want to work less as the net hourly rate offered goes down.
If you're anxious to work an extra hour (if you can) for $14/hr, but less inclined to do so for $12 (after taxes), then you'll be even less inclined to work that extra hour for $10 (after taxes).
So, if there's a flat tax of 14% (reducing the $14 to $12), you might be hesitant to work an extra hour. If there's a progressive tax and that extra hour gets taxed at 28% (netting you $10), you'll be even more hesitant to work the extra hour.
The progressive tax amplifies your inclination to pass on an extra hour of work.
Thank you, I see it now. But immediately, I am inclined to ask, in terms of what you've been saying: what about the effect (not unanimous and uniform, certainly?) on SALARIED workers, who are not paid by the hour? If required, they just have to go in to work, to do what it is that must be done. Whether they might prefer to go, or not. It's a different question, a horse of a different color, I know.
>> The progressive tax amplifies your inclination to pass on an extra hour of work.
This will probably sound more pious about 'hardworkingness' than intended, but I don't know a single soul in my entire lifetime for whom this is or would be true. Does anyone here? Parents, children, other family, colleagues?
Maybe at the very very highest levels of income and privilege, and yes, I recognize that this is premising that the inclination (perhaps it should say 'any inclination') already exists.
But rightly or wrongly it is a not uncommon economic trope. Not the case in my experience.
ps - upon reflection I consider insane-hours gigs. Consultants, medical residents, that sort of thing. I can well imagine such a person calculating Why ffs am I pushing past 3a to work until 4a for the fourth night in a row with no outcome or reward that adds to my total reward or betterment? Of course those sorts of people almost never think like that or reckon in those terms, and/or are expected / mandated / motivated (healthcare) internally or externally to put in those hours.
Consider someone working 11 hours a day, leaving 5 hours for personal time, and 8 hours for sleep. That person would not be especially inclined to give up one of those few personal hours for extra pay.
Suppose that nevertheless this person would, for some amount of money, be willing to give up a precious hour. Then the person would be willing to give up that hour for half as much, a quarter, even for minimum wage.
This comes from the assertion that netting less money would not increase the reluctance (decrease the willingness) to work an extra hour.
Now suppose the contrary. That this hardworking person would not be willing to trade that hour for any amount of money. Not for time and a half, not for double pay, not for 10x. Since the reluctance to give up that hour would be absolute, it likewise would not be amplified by netting less money.
Those would seem to exhaust the options. P or not P. Willing to work the extra hour or not willing to. The former suggests that this overworked person would give up another personal hour for peanuts. The latter says that this supposedly hardworking person wouldn't work another hour for a king's ransom.
Speaking for myself, I have a certain nonzero value I place on each hour of my personal time. If someone wants me to do some extra work, I'm going to have to net at least that much to make it worth my while. The more I'm taxed, the more I'm going to have to charge to net that target amount.
Comments
Most of us need a certain income to afford our life style. Recent data shows that ninety percent of income earners spend more than 100% of their earning so they need to take on additional debt as a means of affording their lifestyle. That math doesn't work.
Income graph:
https://screencast.com/t/rUJS2IeZ6ah
To your second point:
I remember having a conversation with a colleague who couldn't understand why I chose to retire early. My point to him was that he was working for the difference between what he would make (his work income) and what he would receive in retirement (pension income). I further pointed out that he could go elsewhere and work another full time or part time job making his total return (net taxes) much higher. Obviously by staying with his job he was adding years of service to his pension making his eventual pension income higher.
I consider taxes with regard to tax loss harvesting, Roth conversions, and potential qualifications for various benefits (HSA contributions, ACA Insurance subsidies, etc)
Taxes and tax brackets do have many nuisances (tax rules) beyond the marginal taxes brackets. I have always thought a simple flat tax would level the playing field.
Sure, I try to offset cap gains/losses year-to-year, but I find that more about prudent investing than tax planning per se. Besides, it's kind of fun.
David
a) giving up some privacy
b) effectively getting a subsidy from extended family, who live with us. Rent, food. gas. We share all of that.
We don't want to bump ourselves into a higher tax bracket. For several years, on our tax returns, we have come out OWING ZERO TAX. If we had not very much more income to report, it might negatively affect our ability to even do the little bit of investing we do, for heirs as well as for ourselves. And the dividends and capital gains we get are non-taxable for us, in the lowest bracket.
We've paid-in for years and years. It's time the rules worked to OUR advantage, rather than the billionaires and millionaires: every bit of ALL of my earnings have always been subject to Soc. Tax. For them? They pay-in only until their income reaches the legal upper limit. These days, it's something like $127,000. (Hey, politicians! REMOVE THE CAP!) The crisis with SS is manufactured.
Right off the bat, we can ignore graduated taxes. Consider just a flat tax rate. If you're taxed at some fixed rate, you're leaning toward working fewer hours because of the tax. Now raise the flat tax rate. You're even less inclined to work long hours.
A graduated tax rate has almost nothing to do with this propensity. The only effect it has is that as your wages go up, your tax rate goes up, amplifying the effect. But your reluctance to work more hours exists regardless of whether the tax rate is progressive.
Here's the trick in the original question: There is no correct answer. Different people will respond differently. Some people will choose to work fewer hours if they can make the same money, while others will choose to work more hours because they are being paid well for those extra hours.
The exact question above was part of a quick survey given in the labor economics class I'm currently taking. FWIW, the class polled 1/3 for fewer hours, 2/3 for more hours.
That helps to illustrate the somewhat obvious fact that higher wages will increase labor supply in the aggregate, even though some people will choose to work less.
Please, amplifying which effect?
If you're anxious to work an extra hour (if you can) for $14/hr, but less inclined to do so for $12 (after taxes), then you'll be even less inclined to work that extra hour for $10 (after taxes).
So, if there's a flat tax of 14% (reducing the $14 to $12), you might be hesitant to work an extra hour. If there's a progressive tax and that extra hour gets taxed at 28% (netting you $10), you'll be even more hesitant to work the extra hour.
The progressive tax amplifies your inclination to pass on an extra hour of work.
This will probably sound more pious about 'hardworkingness' than intended, but I don't know a single soul in my entire lifetime for whom this is or would be true. Does anyone here? Parents, children, other family, colleagues?
Maybe at the very very highest levels of income and privilege, and yes, I recognize that this is premising that the inclination (perhaps it should say 'any inclination') already exists.
But rightly or wrongly it is a not uncommon economic trope. Not the case in my experience.
ps - upon reflection I consider insane-hours gigs. Consultants, medical residents, that sort of thing. I can well imagine such a person calculating Why ffs am I pushing past 3a to work until 4a for the fourth night in a row with no outcome or reward that adds to my total reward or betterment? Of course those sorts of people almost never think like that or reckon in those terms, and/or are expected / mandated / motivated (healthcare) internally or externally to put in those hours.
Suppose that nevertheless this person would, for some amount of money, be willing to give up a precious hour. Then the person would be willing to give up that hour for half as much, a quarter, even for minimum wage.
This comes from the assertion that netting less money would not increase the reluctance (decrease the willingness) to work an extra hour.
Now suppose the contrary. That this hardworking person would not be willing to trade that hour for any amount of money. Not for time and a half, not for double pay, not for 10x. Since the reluctance to give up that hour would be absolute, it likewise would not be amplified by netting less money.
Those would seem to exhaust the options. P or not P. Willing to work the extra hour or not willing to. The former suggests that this overworked person would give up another personal hour for peanuts. The latter says that this supposedly hardworking person wouldn't work another hour for a king's ransom.
Speaking for myself, I have a certain nonzero value I place on each hour of my personal time. If someone wants me to do some extra work, I'm going to have to net at least that much to make it worth my while. The more I'm taxed, the more I'm going to have to charge to net that target amount.