A while back, Megan McArdle explained why we can’t just keep raising taxes on the rich. While I disagree with her on particulars, one of the things that I have come to understand as we’ve jumped tax brackets is that regardless of what anybody thinks is “too much money” or “won’t be missed,” taxation takes a significant psychological toll. It’s one thing to say “I would be perfectly fine on $75k a year after taxes.” It’s another thing to see that you actually made $115k and the government has taken $40k of it. The progressive (and complicated) nature of the tax code means that you can’t easily factor it in when taking into account how much you’re going to make.

It’s not entirely logical. I mean, theoretically if you make $75k per year after taxes but pre-tax were only supposed to make $90k, it’s objectively no different than if you originally grossed $115. It sure feels different, though. And though the tax rates are marginal so that even if you’re in the “33% tax braket” it’s only part of your money that 33% comes out of, it’s the 33% that you remember. And even though you know and acknowledge that the government provides all kinds of services to you in return for that money, the benefits of government are dispersed and the tax bill laid out right there in front of you.

I am not an anti-tax sort of guy. I don’t think, in the abstract, that taxes are “too high” nor am I in favor of the flat tax which would be beneficial for us financially. If you disagree with me on those things, that’s fine and beside the point (and I don’t want to debate the matter). I’m merely stating where I am coming from. But despite these views, I find myself piqued at how much more is being taken out of our paycheck now than was a year ago. Even while I cannot point to a better way that things should be.

Now, a lot of people (including myself a half-decade ago) will say boo-freakin’-who and will tell me to look at how fortunate I am. And I am indeed fortunate and blessed. But the realization of how the fortunate and blessed can appraise their situation has provided me some insights.

If I get a job, the take-home from whatever my pay is will be little more than 60%. That makes me rather disinclined to work. Irrationally so since 60% is better than nothing and since I have always been willing to take jobs for less than I am worth. Part of me would rather give my time and energy for free to OpenOffice rather than get a low-level techie job making $9/hr of which I get to keep less than $6. Of course, in the current economy that’s not necessarily a bad thing. I don’t take the job and somebody else who actually needs the money takes the job instead. It’s a slightly bigger problem when it comes to my wife. She could probably get more money elsewhere working more hours. But is it worth that for less than 65 cents on the dollar?

Doctors’ hours have fallen in the last decade or so. This is likely due more than anything to lower job satisfaction. But I think that McArdle is right that as marginal tax rates approach and exceed 50%, a lot of folks including doctors will adjust their priorities accordingly. It wouldn’t be rational, but people are not rational creatures. This hurts not only because of the shortage of doctors (which can be remedied by other means) but also because by working less and earning less she would be paying less in taxes and we would be cutting corners which then puts less money in others’ pockets to pay taxes.

So I’m really at a loss as to what the right course of action is. Conservatives will say “cut government!” and liberals will say “raise taxes anyway!” but the sad truth is that with the deficit we’re probably going to have to do both of those things anyway. Or we won’t and we’ll suffer the consequences. Depressing.


Category: Statehouse

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15 Responses to The Psychology of Taxation

  1. Peter says:

    Federal income taxes get most of the discussion, but for many people it’s the local property tax that really hurts. What makes things even worse is that one can easily see the money-wasting that sucks up property tax revenues: cops making $100K plus overtime, endless layers of “coordinators” in the school districts, road crews in which one man is actually working while three others stand around doing nothing, and so on.

  2. web says:

    A large part of the problem with taxation today is that, via “hollywood accounting” and just general fraud, the vast majority of the “rich” get away with paying far less than the tax rates they really should be paying.

    End result: rich Democrats like Hilary Clinton can freely complain about “the rich not paying their fair share.” She should know – she is, of course, one of them. This doesn’t make it any less true that rich Republicans aren’t paying their fair share either, but merely points out that what we SHOULD be doing, rather than merely jacking with the rates, is eliminating the various loopholes through which the higher end avoid paying their fair share to begin with.

  3. capflowwatch says:

    Many people confuse income with wealth. Wealth is the total value of your assets. Income is what you earn from year to year.

    A 50% tax on income may take away half of the wealth of a person with no assets but $100,000 income, while the same tax may amount to only a minute fraction of the wealth of a person with $100 million and negligible taxable income.

    The really rich understand this and also that people are envious of their wealth. To escape this envy (with its possibly dangerous consequences) they agree to the so-called ‘progressive’ income tax.

    The progressive income tax serves to keep the middle-class from becoming wealthy, while preserving the assets of the truly rich.

    Why else are there so many super-rich Democrats that support the income tax?

  4. trumwill says:

    Peter,

    I think that’s true in larger cities, though I think the more likely you are to know the beneficiaries, the less likely you are to object. I mean, if the Callie Police Department is overpaid, that may not be a good thing but it at least keeps the money in the community. The Colosse Police Department is something of a different matter because if diffused over such a large area. Then you get to state government. Then you get to the federal government where the beneficiaries can be imagined to be the worst possible people you can imagine.

  5. trumwill says:

    Web, I don’t disagree about loopholes. I was really big into it when I was in college. The longer I’ve been following politics, the more intractable it all seems. So many vested interests wanting their portion cut out of the tax pie. However, it’s also worth noting that the higher taxes get, the more one is inclined to take advantage of whatever tax shelters one can find. Clancy and I are certainly keeping a stronger eye towards deductible expenses than we used to and it’s possible that as a percentage of our income we will end up paying less than we used to. After an amount of work, though.

    It’s like Cascadia’s sky-high sales tax. People have done studies that said they would pull in more by lowering the tax rate because less people would drive to neighboring states or buy goods online if the tax rates were lower. Per capital, the neighboring state of Umatilla was pulling in more sales tax money despite a significantly lower rate (and less wealth within the state).

  6. trumwill says:

    Cap, that’s a good point, though at the same time I consider the worst tax of all to be property taxes, which is the closest to a wealth tax there is!

  7. DaveinHackensack says:

    “But despite these views, I find myself piqued at how much more is being taken out of our paycheck now than was a year ago.”

    I get that you’re married so her money is your money, but it still seems a little odd for you to write “our paycheck”. Once it deposits, I can see how you would think of it as “ours”, but if it’s her job, isn’t it her paycheck?

  8. stone says:

    Dave, think of it as, *everything* is theirs. Including Will’s time. So, does the couple think selling 40 hours a week of one member’s time is worth it, if they lose 40 percent of the return?

    This is an even bigger issue when you have kids. Both people working means putting kids in daycare, which is expensive. With two, it runs us close to $1600 a month, which my husband grumbles about all the time.

    Of course another thing to think about is benefits. If you have a job which provides health care, that’s usually a lot less expensive than keeping the other member of the family on your policy. My husband carries his own private insurance (because he is a business owner), and I have my own through the company.

    There’s something to be said for the peace of mind of having two independent sources of income, as well. This is more of an issue when one partner doesn’t have a guaranteed income from his or her profession, probably much less so with a doctor working for a group because her income is set and her job security is very high.

  9. trumwill says:

    if it’s her job, isn’t it her paycheck?

    I view it as our paycheck because it’s our money. Whether deposited or not, I am entitled to a portion of the money or whatever is purchased with it. I don’t work for it, but I have sacrificed for it. Likewise, she has a claim on my paycheck because she has assisted in enabling me to earn it. So they’re both “our” paychecks.

    With two, it runs us close to $1600 a month, which my husband grumbles about all the time.

    If our day care costs remotely that much, I’m going to be a SAHD. No question about it.

    Of course another thing to think about is benefits.

    Fortunately, Clancy’s benefits are unbelievably good. They cover everything for both her and me. If her earning potential weren’t so stable, the two sources of income would indeed be more important. Up until now, when she was liable to be unemployed for stretches while looking for the next opportunity for training, it was extremely important that I get my own job. We made sure that we would be able to manage if I didn’t find anything, but that was never the plan.

  10. stone says:

    “I’m going to be a SAHD. No question about it.”

    Such an unappealing acronym …

  11. Peter says:

    If you have a job which provides health care, that’s usually a lot less expensive than keeping the other member of the family on your policy.

    It’s not always the case. When I was with XYZ Insurance Company I stayed on my my wife’s health plan. It was less expensive than going onto XYZ’s plan, and more to the point her plan (New York State employees) is widely regarded as one of the best health care plans in the entire country. I haven’t yet checked the costs for the health plan for my new company, ABC Insurance (there’s a 6-month waiting period so it’s not yet relevant), but my reasoned guess is that her plan will still be the better deal.

  12. Brandon Berg says:

    A large part of the problem with taxation today is that, via “hollywood accounting” and just general fraud, the vast majority of the “rich” get away with paying far less than the tax rates they really should be paying.

    I see this claim quite frequently, but I’ve never seen any evidence that it’s true. How do you know this?

    And yes, I know about tax-exempt bonds, but you have to accept a lower rate of return in exchange for the tax exemption, which is a kind of implicit tax.

  13. DaveinHackensack says:

    “Dave, think of it as, *everything* is theirs. Including Will’s time.”

    But Will isn’t exchanging his time for that paycheck, his wife is. It’s the paycheck from her job (not their job), which would seem to make it her paycheck.

    If I were your husband, using your logic, I’d ask you to do the dishes every night. If you complained, I’d just tell you that what’s yours is ours, so you spending your time to do the dishes is just like me spending the time to do it, even if I’m actually laying on the couch watching Sports Center while you wash them.

  14. trumwill says:

    But Will isn’t exchanging his time for that paycheck, his wife is.

    I’m not exchanging time for it (unless you could the household stuff I do that allows her to more thoroughly focus on her job), but I did exchange my career for that paycheck. I also exchanged a number of lifestyle comforts (living near family, living in any particular place for more than a couple years until now, and the convenience of living in an urban or suburban area) so that she could take the job which draws the paycheck.

  15. thebastidge says:

    “I mean, theoretically if you make $75k per year after taxes but pre-tax were only supposed to make $90k, it’s objectively no different than if you originally grossed $115.”

    Oh, but it is. Most people work much longer hours to make $115k than to make $90k. Even if only all up front in a fancier school.

    “If I get a job, the take-home from whatever my pay is will be little more than 60%. That makes me rather disinclined to work. Irrationally so since 60% is better than nothing and since I have always been willing to take jobs for less than I am worth.”

    You are bending over backwards to support the liberal agenda (although I know you are not that liberal in total, you seem to have a reflexive desire to be so) even though the evidence is right in front of your eyes. It is by no means irrational to resent 40% of your effort and time being confiscated, any more than if they openly robbed you with a gun in your face. It’s not a fair and honest exchange of value that is voluntarily undertaken by both parties.

    Your willingness to take jobs with lesser pay for your own reasons do not invalidate the market value of your work, nor does it make it irrational to desire the full compensation which you negotiated.

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