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Marginal Tax Rates

I keep hearing a lot about the results of tax increases. Currently it seems that people don’t understand that when you move up to another tax bracket, the only thing that is taxed at the higher rate is whatever spill over from the bracket you were in before. What I don’t see is any mention that each successive tier of taxation, insofar as there is an increase from the previous one, renders each dollar earned less valuable.

As an example lets say that we have two tax brackets and you make $250,100. From $0 to $250,000 the rate will be 25%. From $250,001 and up the rate will be 35%. So your taxes on the initial $250,000 would come to $62,500 and the taxes on the remaining $100 would be $35, for a total of $62,535, paid to Uncle Sam.

In that scenario, you have to understand that the incentive to earn more profit is reduced. If another hours work would bring in $100 of additional profit, after taxes that hour of work is only worth $65, as opposed to the $75 per hour you get in the lower bracket.

I’m just saying, increasing taxes on any bracket may not reduce overall income, but it does reduce the average value of an hours work. How many people would work overtime if you were going to get paid 10% less for doing so? Some would, but I think most would not, and this is what concerns me about increasing taxes on anyone. The more progressive the tax system, the smaller the incentive becomes to earn more money.

For these reasons, and many more, I oppose pretty much any tax increases. I also see a problem with having the lions share of tax revenue coming from a very small group of people with highly volatile incomes. You’ll hear that those making over $250k were the first ones to start rebounding after the collapse of the housing bubble, that is true but it’s dishonest, those in that group were also the ones that took the biggest income hit and the ones whose incomes fell the fastest. See what I mean about volatility? It’s all fine and dandy when the economy does well, but as you can see in California, one of the states that soaks the rich the most, they have been driven to the edge of bankruptcy, in no small part because of tax revenue reduction.

The government needs to both cut spending and find new sources of revenue, but in doing that it must be careful not to become even more dependent on a small group of volatile incomes. In the same vein, if any taxes are to be created or increased, large spending cuts need to be made first, not second, because there isn’t a mathematically sound way to tax our way out of the mess we are in and the only way most people are going to accept tax increases is with a showing of fiscal responsibility by Washington. Not unlike a bank requiring a large down payment on a house as a condition of lending you the money to buy it.

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