mbr@fortune.UUCP (03/28/84)
#N:fortune:15800004:000:1368
fortune!mbr Mar 28 10:28:00 1984
I've wondered about something for a while, and maybe somebody out there
can enlighten me. A progressive tax structure which is not indexed to
inflation (or deflation, which is an unlikely but hypothetical possibility)
appears to degenerate towards a flat tax rate given the reality of
inflation (or deflation). My reasoning is as follows:
In an inflationary economy, people with income earn more in number of
dollars to maintain the same buying power. Eventually everyone will
be in the highest marginal tax bracket. If the process continues beyond
even that, eventually the portion of income taxed at lower than the
highest tax bracket becomes negligibly small. At that point, you have
a flat tax rate.
In a deflationary economy (does such a thing exist?), people would get
paid in a smaller number of more valuable dollars. Eventually, everyone
is in the lowest tax bracket.
So, it would seem that unless the value of a dollar remains constant,
the tax structure is constantly trying to turn into a flat tax.
Is there a flaw in my reasoning? If not, how do we manage to continue
to have a progressive structure? How often have the brackets been adjusted
over the years? And by how much? Why has indexing been so long in coming?
{allegra,amd70,cbosgd,dsd,dual,
harpo,hpda,ihnp4,megatest,nsc,
oliveb,sri-unix,twg,varian,VisiA,wdl1}!fortune!mbrmam@charm.UUCP (Matthew Marcus) (03/29/84)
Fortune!mbr points out that if incomes keep changing monotonically, the
tax-bracket structure will degenerate into a flat tax. He wonders why this
has not happened and why indexing is still not with us.
The second question first: One reason indexing isn't here is that
inflation seems to be as much a part of a normal economy as heat production is
of a normal human body, so 'bracket creep' serves as a painless way of raising
taxes. Fedgov keeps raking in more and more without the sordid details of actually
enacting an explicit tax increase. A similar mechanism is in effect for SS
taxes, for which the base rises on a formula determined some years back, so
present Congressthings don't have to keep it before the public that their
taxes are going up yet again.
As to the first point: I don't know how often the brackets have been
changed, but with the present setup, only a small fraction of people are at
either end. Since inflation is historically predomenant, we need only
think of the high end. At present rates, it will still take quite a while
before most of us enter the top bracket -- there are LOTS of steps left, since
the brackets are pretty finely divided.
While I'm discussing this dismal and depressing subject, I'd like to
debunk a myth. Many people think that if they acquire more than a certain
amount over their 'normal' income, they will be 'put into a higher tax
bracket' and their net income will decrease, so they scan the tax tables,
looking for the breakpoint. This fear rests on the assumption that at any
income, the tax is some fraction of the income, said fraction rising as in
a staircase curve. This leads to a piecewise linear and DIScontinuous tax
vs. income curve, wherein $.01 extra income can suddenly incur $$$$ extra
tax. THIS IS NOT TRUE!
The way it works is that the tax is computed as
x % of your first $y
1 1
x % of your next $y
2 2
x % of your next $y
3 3
....
x % of your next $y
N N
with N>>1. This results in a tax curve which is piecewise linear and
CONTINUOUS, so you can never incur more that $.005 (I think) extra tax on
that extra $.01
May the IRS rot in ****
{BTL}!charm!mamwally@cornell.UUCP (Wally Dietrich) (03/29/84)
[Eat me]
mam@charm.UUCP (Matthew Marcus) says the following:
"While I'm discussing this dismal and depressing subject, I'd like
to debunk a myth. Many people think that if they acquire more than
a certain amount over their 'normal' income, they will be 'put into
a higher tax bracket' and their net income will decrease, so they
scan the tax tables, looking for the breakpoint. This fear rests
on the assumption that at any income, the tax is some fraction of
the income, said fraction rising as in a staircase curve. This
leads to a piecewise linear and DIScontinuous tax vs. income curve,
wherein $.01 extra income can suddenly incur $$$$ extra tax. THIS
IS NOT TRUE!"
He goes on to claim that the tax curve is piecewise linear and CONTINUOUS, so
you can never incur more that $.005 (he thinks) extra tax on that extra $0.01.
This is simply INCORRECT. Using the Federal tax tables, you can pay several
dollars for earning one cent ($0.01) too many. For example, if your taxable
income is $20,049.99, you will pay X dollars (I don't have the table handy).
If your taxable income is $20,050.00, you will pay X+9 dollars (it is around
$9, I don't know the exact number.) This is one of the times an IRA is really
handy, although your bank may wonder why you are making a one cent deposit.
Wally Dietrichdys@homxa.UUCP (D.SZE) (03/30/84)
. The "discontinuity" in taxes paid for jumping one $25 bracket is because the IRS assumes that ordinary people cannot multiply. If you use Schedule X, Y, or Z, then there is no jump. That implies that you can save a few ( <10 ) dollars by using the Tax Table if your net taxable income is above the midpoint of the range and by using the Schedule if it is below. David Sze Bell Communications Research
dougs@tekecs.UUCP (03/31/84)
Please look at the instructions for line 38, form 1040. One can either
use the tax tables (which are discrete) or one of the tax schedules X,
Y, or Z (which are continuous) to compute your tax.
For the example given, assuming this is a joint return:
taxable income tax from tax tables tax from schedule Y
$20,049.99 $2611.00 $2615.4981
$20,050,00 $2620.00 $2615.50
Doug Smith
{...!tektronix!tekecs!dougs}
ECS System Peripherals
Tektronix, Inc.
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|--------------------------------------------------------------|btb@hogpc.UUCP (B.BURGER) (03/31/84)
> Please look at the instructions for line 38, form 1040. One can either > use the tax tables (which are discrete) or one of the tax schedules X, > Y, or Z (which are continuous) to compute your tax. Nope. The instructions for line 38 say you must use the (continuous) schedules if your income is $50,000 or more or you use income averaging. They then say: "If none of the above conditions apply to you, you MUST use the Tax Table to find your tax." So while it's true that added income that pushes you into a higher tax bracket still leaves you better off in general, the fact that the Tax Tables round your income to the nearest $50 introduces discontinuities. I liked the suggestion someone made to add to an IRA just enough to make your taxable income end in $...49.00 or $...99.00. --Bruce Burger AT&T-Information Systems Lincroft, NJ
stevev@tekchips.UUCP (Steve Vegdahl) (04/04/84)
A number of people have pointed out that the marginal tax rate is discontinuous in a "micro" sense due to the resolution of the tax tables. I believe that it is the case that if you claim the child care credit, you may find a the marginal tax rate being discontinuous due to the discretely decreasing rate at which the credit is computed as income increases in the $20K-$30K range. If child care expenses are $2K then income rate total credit $27,999 21% $420 $28,001 20% $400 (I might have the percentages off by a point or two, but you get the idea.) With the maximum allowable credit for multiple children, this discontinutity could be as high as $48, even if schedules X/Y/Z are used. Steve Vegdahl Tektronix, Inc.
wally@cornell.UUCP (Wally Dietrich) (04/05/84)
[] FLAME ON! > > Please look at the instructions for line 38, form 1040. One can either > > use the tax tables (which are discrete) or one of the tax schedules X, > > Y, or Z (which are continuous) to compute your tax. > > Nope. The instructions for line 38 say you must use the (continuous) > schedules if your income is $50,000 or more or you use income > averaging. They then say: > > "If none of the above conditions apply to you, you MUST use the > Tax Table to find your tax." > > So while it's true that added income that pushes you into a higher > tax bracket still leaves you better off in general, the fact that > the Tax Tables round your income to the nearest $50 introduces > discontinuities. > ... > > --Bruce Burger AT&T-Information Systems Lincroft, NJ Thank you Bruce for helping me point out the falacies in the arguments of mam@charm.UUCP (Matthew Marcus), wjm@whuxj.UUCP (MITCHELL), dys@homxa.UUCP (D.SIZE), dougs@tekecs.UUCP, and btb@hogpc.UUCP (B.BURGER). I am constantly amazed by the amount of incorrect information on the net. It just goes to show that you should never believe what you see here. Fortunately, it is easy to find solution to this problem, all you have to do is look at the instructions for line 38 in the 1040 form. Flame off. To Matthew, MITCHEL, ...: Someday I will be in the %50,000+ income category too, but until then I guess I'll have to put up with a discontinuous tax rate! Wally Dietrich
ted@teldata.UUCP (Ted Becker) (04/05/84)
********* The tax rates are stepped if you use the tables and linear if you use schedule X,Y,orZ.
ted@teldata.UUCP (Ted Becker) (04/05/84)
******* WHAT!!!! I always use tables XYZ and my income has never been over 50k and the IRS has never complained.
ajs@hpfcla.UUCP (04/11/84)
It's ALMOST true that the tax rates are linear, not stepwise. However, to keep the brainless majority from having to figure (gasp) percentages, the Federal tax tables do have $50 steps in them. Ergo, a one-cent difference in your income can result in a large (say, $15 for ~30% bracket) difference in your taxes. This of course provides irritating incentive to go back very carefully over your Schedule A and see if you left anything out. There is almost always one more, small, but legitimate deduction you've overlooked that can save you the cost of a dinner for two. Alan Silverstein
barrett@hpcnob.UUCP (04/11/84)
Indeed, Oregon effectively has a flat tax rate since the rate ceilings out at 10.8% for income > $5K. (Well, almost except that they won't allow you to deduct more than $7K of federal taxes). Can people stay alive on $5K? Dave Barrett (hplabs!hp-dcd!barrett)