alt Hacker NewsIt's not sufficient to make cliffs impossible, you just never want the effective marginal tax rate go above a certain threshold.
It's insane that we cap marginal tax rates for the wealthy below 50% “because they need incentives to work harder” yet the working class family is facing an effective marginal rate near 100% because of reduced benefits.
The solution would simply be to stop making benefits decrease when salary goes up.
“But it's going to be insanely expensive” one may say, but it's an accounting illusion. All we need to do to break the illusion would be to stop counting gross public spendings and taxes and instead count the net public spendings/taxes for each individual (that is, over the whole population you take the difference between what they pay and what they receive and that gives you how much they contribute or how much they cost, instead of the current accounting system where we count people paying for their own benefits).
What's really expensive is the economic inefficiency of the current system.
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Actually, optimal taxation models tend to show that a base transfer at zero income with an initially "high" marginal rate for clawing back the transfer at the lowest end (but still no higher than 100%, and falling very quickly as earnings increase!) works very well. (Marginal rates then rise progressively for higher incomes, and paradoxically become lower again at the very top end, trending towards zero at the extreme top-end of the scale. This is actually a consistent result in non-linear incomes taxation models; the very top earner should face zero marginal tax on the very last cent she earns!)
The intuition is that you only "feel" the high marginal rate if you earn very little, which impacts very few people; but the effect of making the break-even point more manageable with lower marginal rates for most earners is felt throughout the incomes scale. What really screws up things is higher-than-100% marginal rates, which are regrettably common in real-world systems amd completely useless.
I agree with you, but for what it’s worth I live somewhere top marginal rates are about 50% and indeed 32 hour weeks are very common. I think this is a good thing though.
Yes, looking at the net transfers makes more sense.
However, net transfers aren't a function of income alone. They depend on lots of factors, because they are plenty of benefits that depend on more than income and plenty of taxes like that, too. Eg capital gains taxes and property taxes and sales taxes and tariffs don't depend on your income.
> The solution would simply be to stop making benefits decrease when salary goes up.
That's an option, and I'd be interested in how the math works especially with predictions of how the economy would respond.
That said I don't think not decreasing benefits. But net income (benefits + earned income - taxes) should be monotonic with earned income, and probably at a rate of at least 50% but ideally higher than that up to some reasonable definition of middle class income. It should never be the case that if you earn more you can end up worse off.