Better to make $999,999 to avoid the higher tax rate if made over one million dollars?

Question

That's the question. Some people tell me that if Obama (for an example) imposes say 40% tax rate on people making 1,000,000 dollars, people would just make less than 1,000,000 dollars and still keep the 28% rate. But I think how it works is that 40% is effective only on the amount you make over 1,000,000 dollars and it doesn't apply to the first 999,999 dollars? Right? In other words, if you make 1,100,000, the first 999,999 is taxed at 28% rate and the 100,001 is taxed at 40%?

Answer 1

You are correct. The tax rate being discussed, is the marginal tax rate. Of course, people do try to avoid taxes, and they will try harder to avoid higher taxes. Taxes can also change incentives for those not trying to avoid the tax, though in the case you mention, many economists think that incentives aren't much affected by the U.S. current marginal tax rates, which are lower than most Western countries.

Answer 2

Taxable income over $388,350 has a marginal 35% rate. Those in that bracket would be happy to pay 28%. But yes, it's marginal, each rate applying to the next $X until the next rate kicks in.

Answer 3

It seems foolish to me to avoid earning money just because you'll have to pay some of it as tax. 28%, 35% or 40% - either way you're going to keep 60% or more for yourself. So why give it up? To avoid paying the tax?

The additional tax rate bracket is what it its: bracket. Meaning only the money within that bracket will be taxed at that rate.

Answer 4

Actually, it depends on your location. Here in Maryland, they have passed a bill where the new tax rate is to be applied to all the income of anyone earning over $500,000, so yes, if that were to pass, you would be better off.