Never understood the idea of tax brackets. Why isn’t it just continuous? Computers are calculating the tax now anyway, not like it would be infeasible.
I mean to a degree it is continuous. To simplify things the first $10 you make isn’t taxed. $11 to $15 is taxed at rate A, $16 to $20 is taxed at rate B, etc. This is what is meant by the progressive tax system. Obviously these numbers are much higher in reality.
People who can’t understand this are the ones bragging that they turned down a raise because it would “change their tax bracket”. With one exception at very low income, called the benefits cliff, the more money you are paid the more money you take home after taxes.
Does this make tax brackets less confusing? I want to help you and anyone else reading to understand.
I think what they’re saying is that it shouldn’t be in steps, the tax rate should increase as income increases.
So $11 would be taxed at A.2, $12 at A.4, $13 at A.6 and so on. And $11.50 at A.3.
As it is, it’s more discrete than continuous (from a mathematical perspective). Another problem is that it usually stops. Like where I live, and it tops out at about $250,000.
Yeah I get what they mean but that’s much more complex. I suppose that’s what computers are for but it could make it even harder for people to understand and so many people do not understand the current system.
Definitely agree we need more brackets after the top one. Although this only goes so far, as the more wealthy a person is the more likely their income isn’t classified as income anymore. I’d love to return to post WW2 tax rates on the rich but we need to do something to make them pay some kind of fair share. It’s disgusting what they get away with.
The brackets are pretty simple. It’s percentages and subtractions. Think “buckets” that spill over in the next when they’re full, and each “bucket” has a larger percentage that’s taken as taxes. Keep the numbers small so its easier. Imagine that there are three brackets. 0-100$ pays 10% tax. 101-200$ pays 20%. 200$ and more pays 30%.
Someone who wins 150$ pays 10% on the money they made from 0 to 100$, and 20% on the 101st dollar until their last, so they’ll win 150-10-10=130$ after tax. They didn’t win more than 200$, so no money gets taxed at the third bracket’s rate.
Say that person wins 250$ next year. Their first 100$ will result in the exact same 10$ in taxes. Their 100th to 199th dollars will be in the second 20% bracket. Their remaining 50$ falls in the last bracket, so gets taxed 30%. They will therefore this year make 250-10-20-15=205$ after tax.
Said person gets a big promotion and is now making 1000$ the third year. Their first 100$ gets the same 10$ tax, same for their second 200$ with the same 20$ tax. They have 800$ left in the last bracket, which at 30% means 240$. So they’d be winning 1000-10-20-240=730$ that year.
How would an infinitely adjusting tax percentage be intuitive? Brackets are simple. You pay x% on your income in some bracket and y% on your income in a different bracket. You only need simple multiplication and addition to figure out what you would owe.
A continuous bracket could be defined by a single equation. You’d plug in your income and you’d get out your taxation. No need to look up what bracket you are in.
If you expect the average person to be able to understand an algebraic equation better than the existing system, then I’d suggest you get out of your social bubble and meet more ‘average’ people.
I honestly think they’d understand it about as much as they’d currently understand it - that is, not understanding it very much at all. So I think it would be about the same level of understanding but it would make a lot more sense and would be easier to calculate with.
It’d also remove a lot of incentives for squeezing your income/pension contribution to align with certain thresholds (i.e. tax bracket thresholds).
For example, a sigmoid function (click link for equation). You’d need to mess with the constants to align the function with a range of incomes but the general shape will be the same - a low, almost-zero taxation rate for those who earn the least, rising to a threshold (perhaps even 100%, but a lower value like 75% would probably work as well), giving a high taxation to those who earn the most.
Tax brackets are there for progressive taxation. Progressive income taxation is the most fair form of taxation. The least fair is consumption tax - such as sales tax. Sales tax tax disproportionately burdens lower income households. Since most places have sales tax, an aggressive progression of income taxation is called for to balance the scales.
I’m not speaking against progressive taxation, I’m saying the brackets should be continuous so there aren’t any sharp turns in taxation. Right now the brackets make the taxation discrete, but I feel it should be continuous.
Never understood the idea of tax brackets. Why isn’t it just continuous? Computers are calculating the tax now anyway, not like it would be infeasible.
I mean to a degree it is continuous. To simplify things the first $10 you make isn’t taxed. $11 to $15 is taxed at rate A, $16 to $20 is taxed at rate B, etc. This is what is meant by the progressive tax system. Obviously these numbers are much higher in reality.
People who can’t understand this are the ones bragging that they turned down a raise because it would “change their tax bracket”. With one exception at very low income, called the benefits cliff, the more money you are paid the more money you take home after taxes.
Does this make tax brackets less confusing? I want to help you and anyone else reading to understand.
I think what they’re saying is that it shouldn’t be in steps, the tax rate should increase as income increases.
So $11 would be taxed at A.2, $12 at A.4, $13 at A.6 and so on. And $11.50 at A.3.
As it is, it’s more discrete than continuous (from a mathematical perspective). Another problem is that it usually stops. Like where I live, and it tops out at about $250,000.
Yeah I get what they mean but that’s much more complex. I suppose that’s what computers are for but it could make it even harder for people to understand and so many people do not understand the current system.
Definitely agree we need more brackets after the top one. Although this only goes so far, as the more wealthy a person is the more likely their income isn’t classified as income anymore. I’d love to return to post WW2 tax rates on the rich but we need to do something to make them pay some kind of fair share. It’s disgusting what they get away with.
You are just saying “have 1000 or 1m tax brackets” instead of 5. It is not super different other than being more complex.
You might still be thinking of it as discreet. It would kind of be like having infinite tax brackets.
But yeah, I too think it would be too confusing.
Sounds like a nightmare to try to explain to someone. Technically it should work, but practically it might be difficult.
Why? To me it’d be much more intuitive. I find brackets quite confusing
The brackets are pretty simple. It’s percentages and subtractions. Think “buckets” that spill over in the next when they’re full, and each “bucket” has a larger percentage that’s taken as taxes. Keep the numbers small so its easier. Imagine that there are three brackets. 0-100$ pays 10% tax. 101-200$ pays 20%. 200$ and more pays 30%.
Someone who wins 150$ pays 10% on the money they made from 0 to 100$, and 20% on the 101st dollar until their last, so they’ll win 150-10-10=130$ after tax. They didn’t win more than 200$, so no money gets taxed at the third bracket’s rate.
Say that person wins 250$ next year. Their first 100$ will result in the exact same 10$ in taxes. Their 100th to 199th dollars will be in the second 20% bracket. Their remaining 50$ falls in the last bracket, so gets taxed 30%. They will therefore this year make 250-10-20-15=205$ after tax.
Said person gets a big promotion and is now making 1000$ the third year. Their first 100$ gets the same 10$ tax, same for their second 200$ with the same 20$ tax. They have 800$ left in the last bracket, which at 30% means 240$. So they’d be winning 1000-10-20-240=730$ that year.
How would an infinitely adjusting tax percentage be intuitive? Brackets are simple. You pay x% on your income in some bracket and y% on your income in a different bracket. You only need simple multiplication and addition to figure out what you would owe.
A continuous bracket could be defined by a single equation. You’d plug in your income and you’d get out your taxation. No need to look up what bracket you are in.
If you expect the average person to be able to understand an algebraic equation better than the existing system, then I’d suggest you get out of your social bubble and meet more ‘average’ people.
I honestly think they’d understand it about as much as they’d currently understand it - that is, not understanding it very much at all. So I think it would be about the same level of understanding but it would make a lot more sense and would be easier to calculate with.
It’d also remove a lot of incentives for squeezing your income/pension contribution to align with certain thresholds (i.e. tax bracket thresholds).
Give it a shot. Let me see an equation.
For example, a sigmoid function (click link for equation). You’d need to mess with the constants to align the function with a range of incomes but the general shape will be the same - a low, almost-zero taxation rate for those who earn the least, rising to a threshold (perhaps even 100%, but a lower value like 75% would probably work as well), giving a high taxation to those who earn the most.
You think the general population is going to have an easier time understanding the sigmoid function that some simple multiplication and addition?
Brackets are lobbied for. You cant lobby a straight line.
Tax brackets are there for progressive taxation. Progressive income taxation is the most fair form of taxation. The least fair is consumption tax - such as sales tax. Sales tax tax disproportionately burdens lower income households. Since most places have sales tax, an aggressive progression of income taxation is called for to balance the scales.
I’m not speaking against progressive taxation, I’m saying the brackets should be continuous so there aren’t any sharp turns in taxation. Right now the brackets make the taxation discrete, but I feel it should be continuous.
Oh I see. Well, you gotta understand the public don’t take too kindly to math. Especially politicians.
Could totally do a sigmoid function and just integrate over the income. But the brackets are just discrete approximation of that.
You still have brackets, but they’re at every $0.01