Suppose I want to save up enough to buy a new laptop that will cost me $1,000. At my current income level, how much more would I have to work to obtain it? Well, let’s consider only the simple taxes I would have to pay on additional earned income (there are a pile of other taxes I pay that do not vary with my income, and my existing credits and deductions do not change with my income):
- 25% federal income tax bracket
- 6.85% state income tax bracket
- 15.3% social security taxes (since most is borne by workers, let’s be generous and call this 14%)
- 8% county and state sales tax
In total, 53.85% of every dollar I earn will be taxed away from me. Mind you, I do not make 6 figures. So, in order for me to earn enough to buy that $1,000 computer, I’d have to generate roughly $2,167 in income. Why is this interesting? Well, my wife and I will both be committed full time to work and school next year (me working and she in school) and we very much would like to seek help watching our children for a few hours per day each day. One option for doing that is teaching an extra class – which will earn me $10,000, but really only leave $5,415 in my pocket. If we pay someone “above ground” then those dollars would be taxable to her, say at a 15% average rate (and she uses that income to purchase things and pays sales taxes)– meaning that my $10,000 of output really only translates into $4,234 of child care services rendered. Given this option, I may be better off reducing my time here at work, and taking care of the children myself. Indeed, that’s what we have chosen to do so far. Certainly if my marginal taxes on the $10,000 were zero we would have hired help a long time ago.
Maybe the world is better off if I teach fewer students or respond to fewer e-mails, but it is hard to argue that the tax structure that we have in place does not alter the decisions people make about how to employ their talents. It certainly has altered mine. And yes, those calculations are primitive.
