In short: an ABC reporter who apparently doesn't know much about income tax matters goes around interviewing people who made more than $250,000 in the past and are now planning to reduce their income in the future so as to avoid President Obama's tax hike (which is really just Bush's tax break expiring) for family incomes of a quarter million and over. In other words, there are idiots out there who actually believe that, if your income pops up from $249,999 to $250,000, you suddenly have to pay a higher tax rate on the entire amount! And if marginal tax rate systems indeed did operate that way, then it would make perfect sense to drop your income down if you were close to the limit (giving to charity would be one noble way to achieve this, by the way).
But of course taxes aren't calculated that way in North America (or anywhere else, for all I know). Instead, you pay the lower rate(s) on the amount you earn up to the limit, and then a higher rate kicks in for the rest. It's astonishing to me that:
- ABC News hires people sufficiently ignorant of such matters to write articles on the topic, and
- the reporter was able to find so many people in that income bracket who've never had their tax system explained to them by an accountant or, y'know, a high school math teacher!
2 comments:
You can always convert the tiered rates (the brackets) into a final percentage. The news organizations in the US seem to like this because it is easier to explain.
I like your point about being near a bracket jump though. When I did a co-op, my advisor was getting frustrated with his position (and lack of progress). He pulled me aside on a pay day once and showed how my take-home was only a few hundred less than his take-home because I didn't have as many deductions and he had recently crossed a tax bracket. I never worked it out, but because of the increased rate in the new bracket a pay raise has to be some distance above the bracket point to increase your take home pay.
Put another way, certain pay increases will result in less money being brought home every pay. And that is what the news organizations concentrate on.
Well, our tax system is certainly complicated (not compared to the American one, though) but generally speaking you'll always get more take home money out of a pay raise, even if it pushes you up into a new tax bracket.
Part of what confuses some people, I think, is that they often get their raise in January when CPP and EI deductions start up again (after maxing out at some point in the previous year and thus not reducing take home for the latter part of the previous year).
Therefore, someone may get a 3% raise, let's say, but see that they're taking home less in January than they did in December. That can lead one to think that "I got a raise but my take home went down" when in fact it was just the payroll deductions kicking back in. They'd have seen the same thing (only worse) if they'd gotten no raise at all.
In point of fact, if your gross pay goes up, your take home will go up, too. It just may not go up by as much as you'd expect (or like), thanks to the higher tax bracket being in effect. At least that's the way I've always understood it, and it's line with my own experiences over all the years I was earning a wage. There could certainly be exceptions if certain deductions fall away once you get above a certain amount, but I'd hazard a guess that you'd be making so much money by that point that any raise would more than make up for whatever you might be "losing" by upping your overall salary.
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