A failure to think on the margin

In our textbook, Modern Principles, Tyler and I have “Thinking on the margin” as one of the “big ideas” in economics (I believe that other guy also mentions this concept.) USA Today, in a feature called Math tips for the rest of us, is sadly unclear on the concept of a marginal tax rate:

“That raise actually might not be as good as it looks. The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise.”

As Dean Baker says:

Arghh!!!!!!!! ….No, no and 286,000 times no! The tax system brackets give marginal rates. This means that if the raise bumps you into a higher bracket then you pay more taxes only on the income in the higher bracket. Suppose that the tax bracket for income under $200k is 25 percent, and for income over $200k is 33 percent. If you get a raise that pushes your income from $195,000 to $205,000 then you only pay the higher 33 percent tax rate on the $5,000 that is above the $200k threshold not your whole income. Therefore, there is no (as in none, nada, not any) way that getting more money, and being pushed into a higher tax bracket will leave you with less money after taxes.


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