SecDef reply/continuation
SecDef said:
So, under a progressive tax someone making $100,000 is NOT motivated to get a second job, which is fine. They are, however, in a position to have more disposable income that can be used for higher risk investments (stock, create a small business on the side, etc) that are designed for high reward. They are also in a position where either increase in knowledge and experience can lower the amount of work required to maintain that salary or the same amount of work results in a higher salary (this is common, for instance, in people moving from a large company into a consultant role, or even internal promotion within a company)
I don't understand your obsession with second job or people moving into higher tax bracket through working more. Most cases I'm aware of, including research outlined in the books by Stanley/Danko point out that is not the case. There are few exception such as correction officers and LEOs moving into higher tax bracket via overtime, but in general, that is the exception rather than the norm and in general, is non-sustainable over long period of time.
Usually, in a company, if you are working a salaried job, if your productivity goes up, they don't say since you are 2X productive, we'll cut your workday to half.
Consultants who are paid by the hour or on the basis of project completion is different. If they complete the project in half the time, they get paid full amount in the time completed since the payment is based on completion, not time spent.
In regards to disposable income, in a progressive system, you actually get proportionally (percent wise) less disposable income, the more money you make, once the income clears necessities. This is because a person who makes $500,000 compared to $50,000 gets taxed much more than 10X the person making $50,000.
Usually, when people get internal promotion, the sum of economic benefit+non-cash benefit increases. If the taxable portion of economic benefit increases, then his/her predisposition to find more ways to lower taxes increases. 5% tax saving on an income of $50,000 is much less than 5% saving on an income of $80,000 or $100,000. This predisposition to find more ways to save on tax, higher one's tax bracket and higher one's taxable income come at a cost....personal time and energy is taken away from other resources.
SecDef said:
For those without income, there is exactly zero thought as to what tax bracket they will be in once they find a job. There is neither an incentive nor a disincentive. It is not a criterion for acceptance. A higher base salary directly translates into higher take-home pay.
Example 1: you have to look at net
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I'm looking for a job and I get two job offer:
Job 1 offers health insurance at lower salary and with 401(k)
Job 2 offers much higher salary as a consultant but without health insurance and 401(k) option zero benefits.
Personal fact: I'm grossly overweight, fat, and diabetic with a possibility of needing surgery in the future so the cost of health insurance, if purchased individually, is astronomical.
After tax analysis, it turns out that net return from Job 1 is higher taking into account 401(k) deduction and health insurance benefit.
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Example 2(hidden effect):
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I'm in high tax bracket due to progressive tax system. I invest in muni bonds compared to corporate bonds which would have higher tax liability.
Which investment do you think would create more jobs? Investment in muni bonds or corporate bonds?
Even for lower income people or people looking for job, which do you think creates more jobs? Investing in goverment via muni bonds or in corporation through corporate bonds?
The other side of hidden effect is the human capital of people who could have being producing other things of value other than being involved in tax efficient structures(irrevocable trust, tax efficient mutual fund, ETF, tax deferred insurance product, tax advantaged partnership structure, etc.).
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SecDef said:
I'm not arguing that progressive taxes are good or not here, merely that higher taxes are not necessarily a disincentive.
Additionally, after $360,000 /yr, there is no increase, so there cannot be a disincentive.
Incentive to lower one's tax is greater for someone in 35% bracket compared to someone in 25% or 15% tax bracket. Effective tax saving resulting in lower ETR(Effective Tax Rate) compared to MTR(Marginal Tax Rate) would result in greater savings on per dollar basis, higher one's tax bracket and taxable income.
For example, actual dollar savings is higher if MTR was 35% but ETR was 30% compared to MTR of 25% and ETR of 20% because of progressive tax system. Let's use TI(taxable income) of $400,000. MTR=35% and ETR=30% results in $20,000 saving (lowering tax by 5%).
For a someone in MTR=25% with TI=$50,000 and ETR of 20% (5% tax saving), tax saving would be only $2,500.
However, even for someone who stays in the same tax bracket, incentive to lower tax liability increases the more you make.
If TI=$800,000 and MTR=35% with ETR=30%, 5% tax savings now translate to $40,000. The incentive to spend more time, energy, and money looking for ways to get that 5% tax saving is now higher.
Hope that clears it up.
--John
