Sunday, October 30, 2011

How my taxes are raised matters

I need to pay higher taxes.  To get to fiscal balance, I need to pay higher taxes.  To fund the things I support, such as national health insurance, more Section 8 housing, and a robust military, I need to pay higher taxes.  But I am not paying them alone--to pay more without others paying more is a gesture, and would not solve anything.

The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates.  If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.

If my income is taxed, the impact on my desire to work is ambiguous.  On the one hand, because the cost of leisure would fall, I would have an incentive to work less.  On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.

If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more.  Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.  

4 comments:

Barry said...

"If my income is taxed, the impact on my desire to work is ambiguous. On the one hand, because the cost of leisure would fall, I would have an incentive to work less. On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more."

Has there every been a good study which demonstrated that raising taxes on income has a negative effect on work in general? I assume that there are fringe cases, but enough to make a macro difference?

Ask TaxGuru said...

it would really depend on which choice you make. would you want the incentive or not? These taxes sometimes add to complicate things. haha

Dave Velasco said...

No I don't see much negative effect of tax with working. Unless your taxes are being used into something illegal, straight to the pocket right. Real Estate Course

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