Tax bracket thinking errors
September 25, 2011 7:15 PM Subscribe

A few weeks ago the USA Weekend, an insert to USA Today, published some very bad advice on rejecting pay raises in order to avoid a higher tax bracket, eagerly confusing average taxes for marginal tax rates. Corrections were made. Meanwhile, worries over pay raises may reflect a more common fear based on a widespread misconception of progressive tax rates.
posted by Brian B. (97 comments total) 9 users marked this as a favorite

They are of course idiots to publish an error like that, but I don't blame them too much. In 16 years of schooling, I only really got marginal taxes in the one-credit accounting class I took as a throwaway class my junior year of college.

I think TurboTax makes it easier to not actually understand how taxes work, although of course it's not like the paper forms really explain what you're doing either.
posted by miyabo at 7:21 PM on September 25, 2011

I think that this is willful ignorance in operation here. The constant misunderstanding of marginal tax rates serves the purpose of supporting the narrative that poor folks are getting a free ride and that we unfairly punish the "job creators" for making too much money.
posted by octothorpe at 7:23 PM on September 25, 2011 [29 favorites]

When the design of a system is flawed, it is not the fault of the participants when they don't understand. The mind of the average taxpayer is not now, and will never be, equipped to deal with the concept of marginal tax brackets. Considering their importance, that makes them a policy error of the first order. A formula, simple, continuous, and progressive, would work much better both for political and practical purposes. As a bonus, the parameters of the formula could be indexed to appropriate economic indicators.
posted by FreedomTickler at 7:24 PM on September 25, 2011 [1 favorite]

A lot of people make this mistake, it's kind of surprising. But it's also something conservatives deliberately push in order to make people fear the tax system.

When the design of a system is flawed, it is not the fault of the participants when they don't understand. The mind of the average taxpayer is not now, and will never be, equipped to deal with the concept of marginal tax brackets.

Are you kidding? They are incredibly simple. Hypothetical example:

Your first $10,000 isn't taxed.
The next $20,000 is taxed at 10%
The next $40,000 is taxed at 20%
The next $120,000 is taxed at 25%
and any money after that is taxed at 35%

How is that hard to understand?
posted by delmoi at 7:29 PM on September 25, 2011 [83 favorites]

The mind of the average taxpayer is not now, and will never be, equipped to deal with the concept of marginal tax brackets.

Seriously? Give me a pen, napkin and five minutes. I won't be able to explain how taxes work in reality, but the concept of tax brackets? Sure.
posted by ODiV at 7:31 PM on September 25, 2011 [1 favorite]

Voters don't understand concepts like "higher" and "lower", as in "taxes are lower now than they were under Reagan, the patron saint of low taxes, so perhaps you are not actually being taxed to death". I don't think marginal tax rates are the problem.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 7:31 PM on September 25, 2011 [46 favorites]

If you can't expect the majority of the public to compute 15% tip on a restaurant bill, then understanding marginal tax rates is an even less likely reality.
posted by thorny at 7:34 PM on September 25, 2011 [4 favorites]

When the design of a system is flawed, it is not the fault of the participants when they don't understand. The mind of the average taxpayer is not now, and will never be, equipped to deal with the concept of marginal tax brackets.

It's really not such a hard system and we've been using it for many years. The average taxpayer is expected to have passed high school algebra, and as bad as math education is in this country, progressive taxation requires few mathematical skills to understand the basics.

Now, if schools actually spent 12 and a half seconds a year to teach basic financial literacy, we might all be in slightly better shape. Of course, the basics of taxes and credit cards aren't covered on any standardized test, so good luck getting that information into a high school class anytime soon.
posted by zachlipton at 7:36 PM on September 25, 2011 [3 favorites]

USA Weekend, an insert to USA Today, published some very bad advice on rejecting pay raises in order to avoid a higher tax bracket

Well you want to make it more easy for people to publish their lovecraftian novellas...you gotta understand that the commercial market is going to use it to their advantage as well to publish absolutely 100% horseshit.
posted by hal_c_on at 7:37 PM on September 25, 2011

Hell, American voters keep thinking modern governors from Texas are a good idea, that running a corporation is the same as running government and will accept 10 yeahs of low level war without much consternation, but seem disproportionately worried about a whole slew of overblown concerns... taxes are a ways down my list on what voters should be educated about.
posted by edgeways at 7:38 PM on September 25, 2011 [3 favorites]

rejecting pay raises in order to avoid a higher tax bracket

These are like the unionbusting lawyers that come in for captive audience meetings telling the workers that joining a union will mean that the union will get a percentage of their paycheck.

Is that still cool in the states?
posted by hal_c_on at 7:39 PM on September 25, 2011 [1 favorite]

Remember, folks: The whole modus operandi of the Republican Party is to confuse voters into making bad decisions (voting against their interests). This sort of confusion is intentional, to a certain degree.
posted by chasing at 7:45 PM on September 25, 2011 [19 favorites]

It's really not such a hard system and we've been using it for many years.

And a large part of the public has consistently misunderstood that policy for all of those many years. What you think people *should* do or *should* be like is irrelevant. The facts say loudly and clearly that people don't understand. All of the normative wishful thinking in the world will never change that. Compassion begins with dealing with people as they are.
posted by FreedomTickler at 7:46 PM on September 25, 2011 [4 favorites]

taxes are a ways down my list on what voters should be educated about.

On most tax issues, yes. But if a tax issue makes someone concerned about getting a raise, then I think it could explain how a minimum wage earner puts a Republican campaign sign on their lawn when they otherwise would be neutral. In such a case, it would be a "rational" choice on their part.

Also, this one misconception seems to be able to persuade many to conceive of flat and/or regressive taxes as more fair to everyone, as if correcting an injustice. Also, in searching for tax myths, most of the information and commentary dwells above this issue on the harder ones, as though this isn't really on the political radar.
posted by Brian B. at 7:49 PM on September 25, 2011 [1 favorite]

thorny: "If you can't expect the majority of the public to compute 15% tip on a restaurant bill, then understanding marginal tax rates is an even less likely reality."

Hey, that only fails because at least one party in that case is always looking to screw the other guys into paying more. Taxes don't work like that!

wait what?
posted by mkb at 8:04 PM on September 25, 2011 [1 favorite]

FreedomTicker: All of the normative wishful thinking in the world will never change that. Compassion begins with dealing with people as they are.

Also, people never ever learn or listen when you tell them anything. They emerge fully formed from the womb, and remain in that state until their crystalline, unchanging form ceases its solid-state operation. In fact, they're hopeless. Fuck those guys.

The whole problem could be solved easily just by TELLING THEM HOW MARGINAL TAX RATES WORK. The problem isn't that impossible for them to know, the problem is that no one has told them. SO TELL THEM.
posted by JHarris at 8:08 PM on September 25, 2011 [8 favorites]

Great post.

I have spent my few short working years since graduation paying taxes to my foreign country of residence, and admittedly, I am still woefully ignorant about the specifics of the US tax system. This post has been a good step toward remedying that.
posted by Kevtaro at 8:08 PM on September 25, 2011

The whole problem could be solved easily just by TELLING THEM HOW MARGINAL TAX RATES WORK.

Describe a process that will achieve that result. Assign a probability to its success.
posted by FreedomTickler at 8:12 PM on September 25, 2011

Wow, you've been here since 2004?
posted by desjardins at 8:15 PM on September 25, 2011 [3 favorites]

I don't have to describe it, delmoi already did it up above! And it's clear enough that it's "probability of success" is 100% for anyone who can read! GEEZ.

Wait a second. Are you Discord?
posted by JHarris at 8:15 PM on September 25, 2011 [9 favorites]

Compassion begins with dealing with people as they are.

Compassion for innumeracy is laudable, but it doesn't seem like a good reason for scrapping what is really a simple mechanism for allocating the tax burden, especially when any "continuous, progressive" formula, especially one "indexed to... economic indicators," is likely to far more complex.
posted by multics at 8:22 PM on September 25, 2011 [2 favorites]

In my ninth grade civics class, in a rural public school, we were required to learn how to fill out both the federal 1040-EZ and full blown 1040. We did not learn the concept of tax rates, but its far simpler than actually filling out your own forms by hand, and would hae been at most three minutes of about two hours of class time spent on the subject.

The conception that marginal tax rates are too difficult to communicate to the public is, at best, bewildering. People are not that stupid.
posted by Llama-Lime at 8:24 PM on September 25, 2011

I don't have to describe it

I know, democracy works so much better when people just shape up and do what you say!

I'm not questioning delmoi's ability to explain it to Metafilter readers. I'm asking somebody to describe a realistic scenario by which 90% of American taxpayers come to correctly understand how marginal tax rates work within one year from the present day. If that's too hard, then try 10 years.
posted by FreedomTickler at 8:24 PM on September 25, 2011

Is your argument that Americans particularly stupid or something? They seem to survive with their obtuse system of weights and measures.

I'm asking somebody to describe a realistic scenario by which 90% of American taxpayers come to correctly understand how marginal tax rates work within one year from the present day.

High school seems to have worked where I grew up.
posted by pompomtom at 8:28 PM on September 25, 2011 [3 favorites]

I'm asking somebody to describe a realistic scenario by which 90% of American taxpayers come to correctly understand how marginal tax rates work within one year from the present day.

Print something similar to delmoi's comment on page one of the 1040 A workbook.
posted by Devils Rancher at 8:30 PM on September 25, 2011 [3 favorites]

I know, democracy works so much better when people just shape up and do what you say!

You're trolling.

I'm not questioning delmoi's ability to explain it to Metafilter readers. I'm asking somebody to describe a realistic scenario by which 90% of American taxpayers come to correctly understand how marginal tax rates work within one year from the present day. If that's too hard, then try 10 years.

OKAY YOU HOW ABOUT THIS. YOU TAKE OUT AD TIME ON TELEVISION AT RANDOM TIMES EACH DAY FOR YOUR YEAR. YOU READ TO THEM DELMOI'S COMMENT. DONE AND DONE.

(take deep breaths... he's just an obtuse smarmy asshole with an axe to grind... it's not time yet to switch to GRAR mode... not yet...)
posted by JHarris at 8:32 PM on September 25, 2011 [2 favorites]

This is why we can't have nice things.
posted by mek at 8:34 PM on September 25, 2011 [2 favorites]

It's FreedomTickler's idea that the current tax system should be scrapped because of (allegedly) being incomprehensible. Perhaps the onus should be on FreedomTickler to describe, in concrete detail, a new system that can be "understood by 90% of American tapayers within one year from the present day," and that is also "simple, continuous, and progressive." Until this occurs, trolling seems to be an appropriate term.
posted by Nomyte at 8:35 PM on September 25, 2011 [6 favorites]

Is your argument that Americans particularly stupid or something? They seem to survive with their obtuse system of weights and measures.

Maybe that's the solution:

Your first 7/16 fluid ounces of income will include no taxes.
Your next 12 yards of income will be taxed at the rate of 3 nautical pounds per mile.
The next quart of inches will be taxed at the rate of a fahrenheit of portabello mushrooms.
posted by UbuRoivas at 8:38 PM on September 25, 2011 [49 favorites]

Presumably once one's income has been reduced to 30 below zero, it's the same as having a flat tax.
posted by pompomtom at 8:42 PM on September 25, 2011

Your first $10,000 isn't taxed.
The next $20,000 is taxed at 10%
The next $40,000 is taxed at 20%
The next $120,000 is taxed at 25%
and any money after that is taxed at 35%

Except you are talking about federal adjusted income tax after deductions. Income from long capital gains and qualified dividends are taxed at 15%. Don't forget AMT, state taxes and Payroll taxes.
posted by humanfont at 8:44 PM on September 25, 2011 [2 favorites]

A really simple thought question to pose to people; if the well-off were really that screwed by the tax system, why don't they just elect to make less?

Seriously. It's that simple. It's that obvious. Well, it should be.
posted by Xoebe at 8:46 PM on September 25, 2011 [2 favorites]

Humanfont, it was an explanation of marginal tax rates, not the entire tax code.
posted by snofoam at 8:49 PM on September 25, 2011 [6 favorites]

You're trolling.

More correctly, concern trolling. It is not actually necessary for 90% of Americans to understand how the tax system works (especially if fewer than 50% of them vote). It is only necessary that they understand that it is fair. That is impossible when 50% of the political class is flat out lying.
posted by dhartung at 8:51 PM on September 25, 2011 [12 favorites]

I'm asking somebody to describe a realistic scenario by which 90% of American taxpayers come to correctly understand how marginal tax rates work within one year from the present day.

I think that finding the best teaching example is a good idea, because there's so much disinformation out there, and the progressive tax contains reasons not easily grasped outside of economic discussions. Alternatively, I would propose a tax structure that imposes a single rate beginning at the point where a family of four would begin to save (~50K). That would be progressive, but simpler to explain, and the rationale would be to only tax a profit, and to never cripple economic demand.
posted by Brian B. at 8:54 PM on September 25, 2011

This is what conservatives actually believe. (My version)

There is just too much political spin and too little actually looking at reality in media coverage of taxation. It's easy for your average citizen to get confused but the media has no excuse for it.
posted by furiousxgeorge at 8:55 PM on September 25, 2011 [1 favorite]

It is not actually necessary for 90% of Americans to understand how the tax system works (especially if fewer than 50% of them vote). It is only necessary that they understand that it is fair.

Assuming* the tax system is fair, you really don't want to get into a political dogma where it is taken as gospel to be fair (or unfair). The tax code changes regularly. What is fair today may not be fair tomorrow. I'd rather have an educated population who can evaluate fairness than one that dogmatically accepts beliefs.

* We have to assume the code is fair because it is large, complex, and difficult to understand. There are probably one or two people who actually have a good handle on the US tax code, but most of us don't. Further, the US tax code has historically had lots of special cases designed to favor this or that pet project, policy, or company. At the micro level, the tax code is full of unfair little exceptions. Maybe it is fair when taken as a whole, though.
posted by b1tr0t at 8:59 PM on September 25, 2011 [1 favorite]

JHarris writes "OKAY YOU HOW ABOUT THIS. YOU TAKE OUT AD TIME ON TELEVISION AT RANDOM TIMES EACH DAY FOR YOUR YEAR. YOU READ TO THEM DELMOI'S COMMENT. DONE AND DONE."

Pay for it by taxing campaign contributions at 2%.

humanfont writes "Except you are talking about federal adjusted income tax after deductions. Income from long capital gains and qualified dividends are taxed at 15%. Don't forget AMT, state taxes and Payroll taxes."

Is any of that stuff regressive? (IE: you pay more tax on the first dollar by increasing the number of dollars you recieve?) If not then none of those things matter in this context.
posted by Mitheral at 8:59 PM on September 25, 2011

Okay, there are these buckets, see? Your money goes into one bucket until it overflows into the second bucket...
posted by schoolgirl report at 9:04 PM on September 25, 2011 [5 favorites]

Most people don't understand how car engines work. Maybe we should scrap cars altogether.
posted by Marisa Stole the Precious Thing at 9:10 PM on September 25, 2011 [7 favorites]

And magnets.
posted by desjardins at 9:25 PM on September 25, 2011 [18 favorites]

A really simple thought question to pose to people; if the well-off were really that screwed by the tax system, why don't they just elect to make less?

I've always wondered why people who complain about tax rates simply don't do this. I suspect most folks simply have no idea how tax rates work, and don't really feel they get that screwed by the system. Though everyone else must be either getting royally screwed or totally gaming the system.

I thought these folks mostly enjoy getting their bitch on over the mysterious system.

Most people don't understand how car engines work. Maybe we should scrap cars altogether.

Oh fuck, don't even go there. Not on metafilter. Unless you really want to make a point opposite the one you're trying to make.
posted by 2N2222 at 9:27 PM on September 25, 2011 [1 favorite]

I'm just amazed at how little this idea is actually disseminated. I only recently (as in the last year or two) learned exactly what marginal tax rates were. Prior to that, I'd had the same popular misconception about 'being bumped into a new tax bracket' meaning that you could get really screwed by earning one dollar over the line.

This is an extremely telling misunderstanding. For it to compute at all – for there to even be a momentary acceptance that this is a kind of system we could have – you have to start from the assumption that our government is run by incompetents and our tax policies are grossly, incoherently unfair. This is not the truth. Behind all the political bluster, we have an extremely professional administrative state that keeps the country running pretty smoothly, and vets its policies thoroughly and thoughtfully. It is literally unfathomable to me that the IRS would have a tax code where someone making $250,000 would have a net take-home income less than someone making $249,999. Because it makes. No. Sense.

The fact that intelligent people would even think this could be something that people in Washington instituted is evidence that anti-government conservatives are winning the war. It's a whole lot easier to convince people that less government is always the answer when you've effectively planted the seed that the government we have is incompetent and arbitrary.
posted by dixiecupdrinking at 9:38 PM on September 25, 2011 [24 favorites]

Oh, and truth be told, one's taxes are often much more complicated than marginal tax brackets might suggest. I think it's not very honest to suggest the tax system in the US simple. Rates change. Brackets change all the time. Deductions, credits and so on easily overwhelm lots of folks.
posted by 2N2222 at 9:38 PM on September 25, 2011 [1 favorite]

A really simple thought question to pose to people; if the well-off were really that screwed by the tax system, why don't they just elect to make less?

Yeah, you should meet my father. Smart guy, good with finances, not rich, but did a good job setting himself up for retirement...but soon as you mention the word tax, he turns into a raving lunatic. I was pretty sure for a while there that mom was going to flat out leave him over his refusal for quite a few years to claim retirement benefits that were due him. There was no getting him to understand this very concept. Everyone, including his accountant, tried and he simply wouldn't listen. It was like talking to a brick wall. Some people hear the word tax and do math, others hear it and it goes to some other part of their brain.
posted by billyfleetwood at 9:42 PM on September 25, 2011 [2 favorites]

The phrase marginal tax rate could be changed to interval tax rate instead. Most people can't easily define the word marginal. Arguably, a tax term should be meaningful in English without special terminology.
posted by Brian B. at 9:57 PM on September 25, 2011

If you think explaining the marginal tax rate is difficult, imagine trying to convince someone that the derivative of their after-tax income with respect to their pre-tax income is always positive under the "simple, continuous, and progressive" formula (i.e., that a higher pre-tax income won't ever result in a lower after-tax income).
posted by Pyry at 10:25 PM on September 25, 2011 [6 favorites]

This would be a much more relevant thing to argue about if people still got raises.
posted by drjimmy11 at 10:40 PM on September 25, 2011 [14 favorites]

On a more serious note, after years of absorbing pop culture I was stunned the when I started doing my own taxes to find out:

a) How simple it was, even pre-Turbo Tax. You just follow the instructions and do some 6th grade level math. Granted some folks have more complicated situations, but that's why there are accountants.

and

b) How helpful the people at the IRS are. They have some of the best customer service anywhere; definitely the best of any government agency I've dealt with.
posted by drjimmy11 at 10:43 PM on September 25, 2011 [9 favorites]

I remember when I did my taxes the first time when I was 14 or 15 after having had a summer job. I had heard many vague allusions to being "bumped up into the next tax bracket" and how bad you get screwed when that happens, and always wondered why we had such a ridiculous system, feeling vaguely uncomfortable that no one had managed to figure this problem out. After a surprisingly short and easy process, I gleefully calculated my refund and while figuring out where to mail my return I saw the tax table in the back of the booklet, and I still remember my reaction:

Relief, the system actually makes sense! That's such a good idea, it's like.. you only get taxed at a higher rate on the extra money you make, so you always make more money when you make more money! Wait.. what the hell, why are people on TV always complaining about getting bumped into the next tax bracket then? Are they morons? Have they never done their own taxes?

It honestly makes my stomach turn a little bit when I realize that there are adult journalists giving financial advice who don't understand this idea.
posted by skewed at 11:26 PM on September 25, 2011 [14 favorites]

This is why we can't have nice things.

See, this is another common misconception.

We can have up to five nice things tax-free.
The next five nice things are taxed at the rate of one stupid argument over semantics per thing.
The next four nice things are taxed at a rate of three smarmy sockpuppet derails per thing.
All further nice things are subject to a tax of responding in good faith to two YouTube comments per thing.

posted by No-sword at 11:41 PM on September 25, 2011 [30 favorites]

It must be pointed out that the biggest promoters of the "Rich Are Taxed Too Much" meme, the billionaire Koch Brothers, have, according to the Forbes 400, increased their total net worth from $32billion to $50billion in the last two years. And if they are obviously not afraid to make more money for fear of tax liability, then why should you be?
posted by oneswellfoop at 12:25 AM on September 26, 2011 [3 favorites]

I had this argument with my youngest brother a couple Christmases ago. He was insistent that I had it wrong; showing him the IRS tax tables didn't sway him from completely misunderstanding marginal tax rates.

It's surprisingly widespread - I've seen several instances on forums of people arguing fervently for the wrong interpretation: "Don't you see - if I make more, because of tax I'll be earning less. Why won't you understand that?"
posted by outlier at 12:32 AM on September 26, 2011

We have a similar problem here in Australia. Nominally, the tax-bracket thing is very similar to the US, but then there are a great deal many more payments and concessions for families that, in some instances, can cause your net-transfers to be regressive. If you earn $149,999, and your partner earns zero, and you have a child under 5 years of age, then that extra $1 earned will cost you $4004.05.

There are now quite a few benefits linked to the magical primary-earner income of $150,000, and every addition makes for an amusing media beat-up when people earning in the top decile of income complain about how hard they have it.

Of course, the more concerning side is that the combined withdrawls of FTB-A, FTB-B, and low-income support payments mean that a secondary earner returning to work will suffer from marginal tax rates of up to 80 per cent at some income ranges.
posted by kithrater at 1:37 AM on September 26, 2011

this is not just a USA issue of course... I think you will find that most developed nations use a similar progressive tax bracket methodology and also have longstanding issues with explaining it to the general public.

(I know first hand that in Australia there are people who falsely believe that you can end up with Less Net Income by having a higher Marginal Tax Bracket.)
posted by mary8nne at 2:20 AM on September 26, 2011 [1 favorite]

In probability and statistics, "marginal" is used in a different way. "Marginal" means a sum or average over something else, so "marginal" tax rate always seemed to me to imply you tax rate over all dollars you earn. But it actually means just the opposite, which is confusing.

If we use the term from probability, we would call the "marginal" tax rate a "conditional" tax rate; that is, a dollar is taxed at X% under the condition that you earned Z dollars previously. Fundamental to understanding this is understanding that not all dollars are taxed at the same rate. This seems to me to make more sense, but then, I am a statistician, so, YMMV.

I didn't fully understand tax brackets until my first job, which happened to be outside the US. US brackets work basically the same where I live now, but I never did any research on this in the States, I guess because I never felt like I didn't understand it (even though I really didn't). I think that's the main problem here. People don't know what they don't know.

Adding to this is the stupid "tax day" that everybody talks about - "You had to work until X day of the year to pay your federal taxes!" No no no. That's not how it works. It would make much more sense to say that you don't START paying taxes until sometime in the middle of the year. At the beginning of the year, your dollars are not taxed, because you haven't made enough money yet!

Perhaps we should start a website advertising the alternative day; that is, the day that you start paying taxes. A nice website might get the point across.
posted by Philosopher Dirtbike at 2:41 AM on September 26, 2011 [3 favorites]

So if I read this right, you're all saying can earn 1 dollar over the line and get screwed?
posted by roboton666 at 3:18 AM on September 26, 2011

1. We have a similar problem here in Australia. Nominally, the tax-bracket thing is very similar to the US, but then there are a great deal many more payments and concessions for families that, in some instances, can cause your net-transfers to be regressive.

2. (I know first hand that in Australia there are people who falsely believe that you can end up with Less Net Income by having a higher Marginal Tax Bracket.)

Two Australians enter. Only one may leave. DEBATE.
posted by No-sword at 3:55 AM on September 26, 2011 [3 favorites]

These are like the unionbusting lawyers that come in for captive audience meetings telling the workers that joining a union will mean that the union will get a percentage of their paycheck.

Is that still cool in the states?

Pretty much, yes. The 'it'll cost me money to be in a union' meme is really widespread. Quite where it's originating, I'm not sure.
posted by hoyland at 4:20 AM on September 26, 2011

Your first $10,000 isn't taxed.
The next $20,000 is taxed at 10%
The next $40,000 is taxed at 20%
The next $120,000 is taxed at 25%
and any money after that is taxed at 35%

How is that hard to understand?

I'm sorry, I'm an American and I never recieved any math education in my homeschool/defunded public school, so I'm afraid I don't follow. What is that thing with the two circles with the line between them? Does that represent liberals and republicans because I don't talk to no liebruls because they lie. What if, instead of making my next 20,000, I just make 10,000 again can I not be taxed? I know you told me not to drink antifreeze but it smells so good I'm just going to have to go with my gut on this one.
posted by fuq at 5:22 AM on September 26, 2011 [9 favorites]

If we use the term from probability, we would call the "marginal" tax rate a "conditional" tax rate;

We don't; we use the term from economics. Where "marginal" or "at the margin" pretty universally refers to a (partial) first derivative of something. If tax bill T is a function of income Y, then marginal tax rate = dT/dY.
posted by ROU_Xenophobe at 5:31 AM on September 26, 2011 [2 favorites]

This discussion is taxing.
posted by blue_beetle at 5:40 AM on September 26, 2011

Yup, "marginal" = "derivative".

It's the only thing I remember from my Econ 101 course.
posted by benito.strauss at 6:10 AM on September 26, 2011

Funny. I knew how it worked, but didn't know this was what "marginal tax rates" meant.

As for all the misconceptions: One person's misconception may be some other (rich) guy's deception.
posted by Goofyy at 6:14 AM on September 26, 2011 [1 favorite]

My mother -in-law fought tooth and nail to dissuade us from getting a 15-year loan for our house because of this very issue. She still thinks that once we pay off our house we're going to go bankrupt because we can't write off the mortgage interest anymore and that's going to put us in a higher tax bracket. I haven't tried to explain it to her... just thinking about trying makes me sleepy.
posted by Huck500 at 6:37 AM on September 26, 2011

We don't; we use the term from economics.

Yeah, I know, that's what's confusing. It's interesting that you say "marginal" in Economics means the first derivative, because in probability and statistics, it implies integration. It's weird how such closely related fields can have opposite definitions of "marginal" (after all many people, such as both Keynes and Friedman, published in both literatures!).
posted by Philosopher Dirtbike at 6:47 AM on September 26, 2011

The whole problem could be solved easily just by TELLING THEM HOW MARGINAL TAX RATES WORK. The problem isn't that impossible for them to know

Remember Schoolhouse Rock? OK Elect me President and I will make it mandatory that any company using the public airwaves to broadcast their television shows must also broadcast a Public Information Ad once every 3 hours. We could do 1 minute ads on Taxation, Government Benefits, and Constitutional Rights.

We (The USA) could educate the public if we (The People) wanted to, but we (Those in Power) don't want to.
posted by Secret Life of Gravy at 7:08 AM on September 26, 2011 [3 favorites]

It is sad. I can even remember a college business professor at Penn State that made the same mistake USA today has. I am not sure extactly when I learned the correct way taxes are applied, but I do thnk the misconception is all around us, even in our schools.
posted by amazingstill at 7:09 AM on September 26, 2011

Perhaps we should start a website advertising the alternative day; that is, the day that you start paying taxes

And then on that day people would stay home.
posted by Secret Life of Gravy at 7:11 AM on September 26, 2011

It's possible some people aren't misunderstanding the situation. You're in job position A and may be promoted to job position B. For the sake of argument, as an A you now earn at the very top of your tax bracket. We know, because we understand marginal tax rates, that this income will *always* be taxed at this rate, whether you make more or not. But position B comes with added burdens: longer hours (and you work salary), more pressure, less enjoyable work. It's entirely reasonable to add tax considerations in, because you may find that the net income difference between A and B is just not worth it. You won't earn less in B, but the difference in gross income isn't the whole story.

The possibility of working overtime should trigger similar considerations, depending on your collective agreement/contract, of course.

Is that what most people mean? Sadly, no.
posted by Durn Bronzefist at 7:16 AM on September 26, 2011

hal_c_on writes "These are like the unionbusting lawyers that come in for captive audience meetings telling the workers that joining a union will mean that the union will get a percentage of their paycheck.

"Is that still cool in the states?"

How do unions in the states keep their lights on? 'Cause in Canada your average union takes both a percentage of your cheque and a flat monthly due regardless of your employment status.
posted by Mitheral at 7:19 AM on September 26, 2011

It's possible some people aren't misunderstanding the situation.

Right, and what you describe is the legitimate argument against progressive taxation. Everyone has a point at which the increased marginal cost to them of working more will make it no longer worth doing; and by increasing taxation on that extra income, we are simultaneously decreasing the marginal benefit of working those extra hours. This has the effect of discouraging people from working harder/more. It's plausible that someone might make $50 an hour for the first 40 hours a week they work, and then only $35 an hour for the next 20 due to being bumped into a new bracket. (I'm making these numbers up just to illustrate the principle.) This probably does decrease economic productivity, and there is certainly an argument that it is unfair and creates the wrong incentives. The question is, so what?
posted by dixiecupdrinking at 7:26 AM on September 26, 2011 [1 favorite]

I've always wondered why people who complain about tax rates simply don't do this.

This is a digression from the main point, but I have known people who chose to live on untaxable incomes for reasons of principal, usually to avoid paying taxes to support war. I always found this an interesting and complicated choice--after all, you're also then not paying taxes to support infrastructure or social programs. But, also, I find the concept of "untaxable income" slippery. The people I know who did this essentially chose to live in voluntary poverty, but my family lived on an "untaxable" income as middle-class folks with an income between 50k and 60k. Until my partner started making significantly more money five years ago (he hit the magical "five years experience" as a programmer and started being qualified for jobs that paid 80k and up), we always got back every penny of our withholding because, by the time we took the deductions for our kids, and our medical expenses, and our mortgage interest, and so on, our taxable income was very low. Many years we got back significantly more than we paid in because, until we got married, I qualified for the Earned Income Tax Credit even though I was living a comfortable middle-class lifestyle with my computer programmer partner.
posted by not that girl at 7:27 AM on September 26, 2011 [1 favorite]

Part of the mis-perception might be due to withholding rates, seeing as those can skyrocket on the occasional paycheck with a bunch of overtime on it. I've seen withholding eat a large part of bonuses & time $ 1/2 pay, because it bumps people into a higher witholding bracket, so it looks bad on paper but it mostly comes back in the form of a refund.
posted by Devils Rancher at 7:30 AM on September 26, 2011 [1 favorite]

Right, and what you describe is the legitimate argument against progressive taxation. Everyone has a point at which the increased marginal cost to them of working more will make it no longer worth doing; and by increasing taxation on that extra income, we are simultaneously decreasing the marginal benefit of working those extra hours.

First, it seems like this only works for people who are not on salary. If you aren't on salary, you can get overtime pay (more than?) makes up for that. Second, this is even if you tax everyone at the same rate, due to the decreasing marginal utility of money (at least, I think; I am not an economist).
posted by Philosopher Dirtbike at 7:31 AM on September 26, 2011

Pretty much, yes. The 'it'll cost me money to be in a union' meme is really widespread. Quite where it's originating, I'm not sure.

Well, when my workplace was unionized, my paycheck went down because of the union dues. I suppose that's where it comes from--you have to pay a thing you didn't have to pay before. It did actually cost me money to be in a union. The question then becomes: is it worth the cost?

In my case, over the next few years as the union went back to the table to negotiate new contracts, I definitely saw improvements in working conditions because my group of workers was now in the union, so on balance I thought it was worth it. Of course, it also seemed like our membership in the union was used to placate the adjuncts and to have something to negotiate with: "We're going to the table with a demand that part-time faculty get health insurance, because we are totally on your side!" "Sorry, we had to give up the insurance to get this other thing that is much more important but doesn't actually affect you part-timers." Etc.
posted by not that girl at 7:36 AM on September 26, 2011

This probably does decrease economic productivity, and there is certainly an argument that it is unfair and creates the wrong incentives. The question is, so what?

How the argument may or may not be harnessed isn't my concern. I'm just saying that people may be hearing others (who know what they're talking about) mentioning higher tax brackets and associated concerns and themselves misunderstand the situation. That doesn't mean everyone does. At some point, my time is worth more than additional money. The fact that it's not $X but $%X may shift that point somewhat.
posted by Durn Bronzefist at 7:38 AM on September 26, 2011

Observation, really, not even argument.
posted by Durn Bronzefist at 7:38 AM on September 26, 2011

She still thinks that once we pay off our house we're going to go bankrupt because we can't write off the mortgage interest anymore and that's going to put us in a higher tax bracket

I had a high school teacher tell the class that if you pay off your house you should immediately take out a new mortgage for the tax benefits. This made me very anxious because I knew my parents had paid off our house a few years earlier. My dad explained it to me, with much eye-rolling and scoffing and "who the hell hires these people" kinds of comments aimed at the teacher.
posted by not that girl at 7:39 AM on September 26, 2011

At some point, my time is worth more than additional money.

Isn't this a good thing? I'd rather have 100% of people working 40 hours a week, than 50% working 80 hours a week, and the other 50% unemployed.
posted by bashos_frog at 7:44 AM on September 26, 2011 [2 favorites]

Sure? Yes? Maybe? I don't really care. I'm not arguing tax policy.
posted by Durn Bronzefist at 7:46 AM on September 26, 2011

It's interesting, because while this is obviously a total misunderstanding of the way marginal tax rates work, a similar concept does apply for low-income wage earners who receive various work support benefits - the benefits cliff. If a particular benefit, like food stamps, is set up so that a family becomes abruptly ineligible for it after passing a certain income level, then it is completely possible for an increase in earnings to result in a decrease in total take home income + benefits.
posted by yarrow at 7:53 AM on September 26, 2011 [5 favorites]

How the argument may or may not be harnessed isn't my concern. I'm just saying that people may be hearing others (who know what they're talking about) mentioning higher tax brackets and associated concerns and themselves misunderstand the situation. That doesn't mean everyone does. At some point, my time is worth more than additional money. The fact that it's not $X but $%X may shift that point somewhat.

Yes, I agree.

First, it seems like this only works for people who are not on salary. If you aren't on salary, you can get overtime pay (more than?) makes up for that. Second, this is even if you tax everyone at the same rate, due to the decreasing marginal utility of money (at least, I think; I am not an economist).

I think you're right on both points. Marginal tax rates just hasten the moment at which people are no longer incentivized to work more. This is only a problem if you think that the point at which they would stop working under no taxes or a flat tax is categorically more correct or desirable than the point at which they would stop working under a progressive tax system.
posted by dixiecupdrinking at 8:09 AM on September 26, 2011

Enough about taxes, eggheads. Why does my insurance cost so much?
posted by TwelveTwo at 10:22 AM on September 26, 2011

the moment at which people are no longer incentivized to work more.

By this logic, people in the US have not been incentivized to work more for the last 30 years, because in that time, most of us have seen our adjusted wages stagnate, while at the same time, we've seen massive productivity growth.

Forget the dis-incentivizing effects a fair progressive tax code might theoretically have on the high-end: how about the fact nobody in corporate America wants to pay a fair or living wage anymore? I'd think that would be much more directly and immediately detrimental to economic productivity than the existence of a safety net or the threat of moving into a higher tax bracket. And yet, here we are a half dozen tax cuts only for the rich later, on paper more productive than ever, while fewer and fewer of us actually reap the rewards.
posted by saulgoodman at 10:40 AM on September 26, 2011 [2 favorites]

while this is obviously a total misunderstanding of the way marginal tax rates work, a similar concept does apply for low-income wage earners who receive various work support benefits - the benefits cliff.

Notably, a guaranteed minimum income does not suffer from this problem.
posted by jedicus at 10:43 AM on September 26, 2011

How do unions in the states keep their lights on?

Hm, no union members on MeFi? Union dues are subject to state law, and in a lot of cases, there is a "right to work" regime in place that effectively neuters unions that are not representing national workforces (e.g. auto or telecom workers), and prevents unions from being able to automatically deduct from a worker's paycheck. In these states, union dues are paid voluntarily at a rate about 80% lower than if collected automatically.

In any case, union dues are a federal tax deduction (under unreimbursed employee expenses, subject to a 2% of taxable income ceiling). Bringing this back to marginal tax rates, your marginal rate is what you can mentally deduct from your union dues as your tax savings -- e.g. if your marginal rate is 25%, and your union dues are $1000, you will (more or less) save $250 in taxes.
posted by dhartung at 10:57 AM on September 26, 2011

While it's a mistake to think a salary hike moving one into a higher bracket will result in less take-home pay, there are effects that the marginal system has that can make it prudent to move earnings to different calendar years.

It might make sense to defer exercising or selling stock options to a later year.

If you expect to be in a lower bracket during retirement, then pre-tax retirement savings that ordinarily would have been taxed at 35% might be saved until retirement and only taxed when withdrawn at maybe 25%.

Both of these scenarios involve risk that by trying to be taxed less on some earnings, you might lose some of the value. The worst is when you exercise options, take a tax hit based on their market value at the time (B), then sit on them until you've owned them for a year so you can pay long-term capital gains (15%) instead of regular earnings (25, 35, or 39%) but the value falls below B.
posted by morganw at 11:34 AM on September 26, 2011

True, but complicated.

I think a marginal system is fair, but getting people to understand it is hopeless when one side of the argument has a vested interest in drumming up outrage about "overtaxation," and we live in a country where more people believe in angels than believe in long division.
posted by uberchet at 11:43 AM on September 26, 2011

I remember as a kid, flipping through a Scott Adams book, in which he called out "bumped tax bracket means you'll get less money" as bullshit. For some reason, that stuck with me.
posted by RobotHero at 12:40 PM on September 26, 2011 [1 favorite]

I lost a wonderful assistant at my last job because of the benefits cliff: she had two jobs and made just enough money to lose her childcare assistance, which was much more valuable than the additional money she was earning. Her job with me was fewer hours, so even though it was in the field she'd gone to school for, she had to quit. :(
posted by epersonae at 1:56 PM on September 26, 2011 [3 favorites]

Increased compensation can result in less take home pay in circumstances where there are two income earners in the household or you cross into AMT. The tax code isn't as simple as you think it is.
posted by humanfont at 4:28 PM on September 26, 2011 [1 favorite]

At what income level does AMT kick in and is it before or after the progressive steps reach there maximum?
posted by Mitheral at 8:07 PM on September 26, 2011

Increased compensation can result in less take home pay in circumstances where there are two income earners in the household or you cross into AMT. The tax code isn't as simple as you think it is.

That's due to specific, special exceptions carved out in the basic tax code, not some property of the progressive tax code itself, though.

Just like the earned income credit issue (which can result in the kind of issue you describe if you stop being eligible for the bonus tax cut it offers).

It's not the tax brackets that cause those kinds of problems though, but the fact that we try to use our tax code as a substitute for state social programs because government spending in the form of "tax breaks" is more politically attractive these days. It's the unfair and ad hoc ways in which all these different tax breaks (like the EIC) are incorporated into the tax code that causes the kinds of problems you're describing.
posted by saulgoodman at 9:45 AM on September 27, 2011

The tax code will always be complex. Income is very difficult to quantify when you look at high income earners or people with big blocks of assets.
posted by humanfont at 10:54 AM on September 29, 2011

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