Friday, October 23, 2009

Are You A Sucker For Taking That Raise?

An article in Forbes points out the many disincentives our tax code lobs at people whose goals in life are some combination of: make more money, get married, get college educations for the kids.

It does a lot of soul-searching over the whys involved in giving incentives to those who don't work as hard and don't move up the financial ladder. It seems pretty clear cut to me though. Our tax code is constantly tweaked and tailored with the goal of equalizing income. The goal is to take money from those who have it and give to the government, who will give it to those that don't. Think that's crazy?

"There are now more than two dozen federal tax breaks, including seven created or expanded by February's $787 billion stimulus, that disappear (often simultaneously) as income rises. As her adjusted gross income climbs from $60,000 to $90,000, a single parent could lose some or all of the $1,000 per child credit, the $2,500 per college student credit, the $400 Making Work Pay credit and the $8,000 first-time home buyer credit, as well as deductions for contributions to an individual retirement account and for interest paid on a student loan. Such gotchas can push up the marginal federal income tax rate--that is, the tax on the next $1 earned--far beyond the top 35% rate imposed on rich folks."

It's easy to say, well of course tax breaks go away as you make more income. We have a progressive tax system, after all. True enough. The problem is, in the rush to hand as much money as possible to those in the lower income brackets, the definition of "rich" or even "well off" grows to encompass more and more people. That's the only way to explain the graph on page one of the linked article, which plots the marginal tax rates for single parents.

Obviously, there are people that need the help. But the goal of society should not be to increase the number of people on one dole or another. It should be to provide people with the means to get off the dole forever. Our tax system, with its perverse incentive to make less money, doesn't do that.

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