This Bonus Season on Wall Street, Many See Zeros

Bobf: the tragedy is what you think you'll "need" to spend. Most people, even in your world have less money or more kids, and are happy about living in NYC and don't think (often anyway) about what life would be like on the outside with the same comp.

Also, didn't you hear, plenty of people who make your money and way more send their kids to public school these days. Go to an elementary school class potluck for an elementary school in any of those rich downtown hoods or even the UES now, and half of the parents are IBers. Safety has not been an issue for a long time.

Hey Dwell, even people who don't make 400k pay taxes too, thereby reducing the money they actually have as well.

Dwell: Do you think it's a revelation that people have to pay taxes? As oohah points out, people that "only" earn $200K also pay taxes and the difference in tax brackets is pretty minimal.

Oh, speaking of tax brackets, it's already been pointed out, but no one even pays 50% as a marginal tax rate much less as an effective tax rate. If you have a big mortgage, it might be closer to half of that.

Not quite 50%, but if you include FICA, City, and State tax, it gets pretty close.

While their top tax bracket might be close, a couple making $400K does not take home double the amount of another making $200K.

With that said, I do agree that a couple making $400K have nothing to complain about.

The highest marginal tax rate in NYC is 45.5%. That's federal + state + city. FICA's not included because you stop paying FICA long before you hit the top federal tax bracket. And that 45.5% rate is only on taxable income above ~$375K, so folks making $400K won't actually pay anything higher than 43.5%, which is the new bracket down.

In reality, the 43.5% isn't a real tax rate because the state and local taxes are deductible from the federal taxes, so you need to back out 33% of the 10.5% state and local taxes, which leaves you right around 40%. So that's the theoretical marginal rate at $400K. And effective rates will be well below that. According to the data I could find easily on Google, households earning between $200K and $1.2M averaged an effective federal tax rate of 25% (including FICA, etc.). I'm too lazy to try and figure out what that means in terms of average portion of the income subject to federal taxes, but I think it's fair to say that it's unlikely that the effective state and local rate would be greater than 8.3%, so the effective tax rate in these brackets averages no more than a third of people's income.

New York City has a relatively high tax burden, it's true, but just by realistic about the numbers we've "discovered" that a $400K earner gets to keep $40K - $75K after taxes more than was being suggested upthread. That's enough to pay for private school for the kids, and it's in what people are basically dismissing as the rounding error on taxes for these folks.

Did you include AMT?

Another reason why it feels like 50% is because most people tend to just concentrate on the final paycheck which is also net of 401K, med/dental/life/lt disability ins, and fsa's.

The problem with the claimed marginal tax rates is they aren't actually accurate. Yes, thats what the "rates" are at those levels.... but it leaves other pieces that actually factor into what you pay... including deduction phase outs.

I saw a study once where they looked at the income levels where certain deductions phase out, and when you actually include that in the true amount paid, the marginal rates can hit like 60%.

So, your "rates" might be, but whatever dollars lose you X deduction... or raise your capital gains rate by y. Turns out the actual marginal as you cross the threshold is MUCH higher.

Sunday--the highest AMT rate is 28%, so if you're paying AMT your highest marginal tax rate is 38.5%. There's some complication with the phaseout of the AMT exemption, addressed below.

somewhereelse -- while it's true that in some scenarios you end up with some compounding effects in marginal rates (the AMT phaseout is another good example of this), this is only the case because you've benefitted from some tax reduction for other dollars. So this may change the taxes you end up paying on your marginal dollar, it's not possible for your total tax burden to ever exceed your marginal tax rate. So even though it may seem that earning one more dollar exposes you to $.60 of taxes, you're really changing the tax rate on some previous dollar that was taxed $.20 back up to $.40, so even if this happened to all of your income you'd still only end up paying 40% in taxes.

But once again, if you look at effective rates, in practice people pay quite a bit lower than their marginal rates--which only makes sense given that some of your income is always taxed at lower rates or subject to some sort of deduction, so most people don't end up particularly close to their marginal rates.

Oh, and Sunday I think you're right that a lot of people see that their take home pay is <=50% of gross and blame it on taxes. But I'm sort of hoping that someone that earns $400K and works for a financial institution understands the difference between "taxes" and "saving money for retirement" or "paying for my kids' daycare in a way that allows me to avoid taxes". But maybe I'm being overly optimistic.

jordyn, I had many discussions with finance people and non-tax accountants who think that when they hit the next tax bracket, ALL their income is taxed at the higher rate. I have also encounter many people with advance degrees who seems to lack basic common sense. Combine that with very specialized jobs, don't over estimate what people should know/understand.

I think many of you missed that people at lower salary levels experience much higher implicit marginal tax rates than those at higher levels of income. The implicit marginal tax rates from 20,000 to $60,000 can in some cases be 80% and with the new tax structures (this is before the extensions of the Bush tax rates, I can't find newer graphs) go higher than 100%!

http://mises.org/daily/3822

This is because the rise in income also has implied phase outs of deductions as well as phase outs of other government assistance.

Note, NYC & State taxes and benefits have not been added. My guess is that, since they are even more progressive, the effect is exacerbated.

"So this may change the taxes you end up paying on your marginal dollar, it's not possible for your total tax burden to ever exceed your marginal tax rate. So even though it may seem that earning one more dollar exposes you to $.60 of taxes, you're really changing the tax rate on some previous dollar that was taxed $.20 back up to $.40, so even if this happened to all of your income you'd still only end up paying 40% in taxes."

Its true, but your actual marginal rate is still .60. I agree, total tax burden is also important, but folks shold be aware of how much they actually make with the extra income...

AND that the rich are actually paying even more than most people thing because of factors like that.

"jordyn, I had many discussions with finance people and non-tax accountants who think that when they hit the next tax bracket, ALL their income is taxed at the higher rate"

That one always blew my mind.

Its up there with folks who want to save on taxes by making less.

for a lot of people in the working class arena they can actually face the situation where they make LESS when their salary goes up. Certainly few will want to work harder if they have marginal rates of 70-80%

This is a legitimate problem with a progressive tax system that is also coupled with various levels of government assistance. And it is SO complex that without having tax software and the details of each persons returns you simply CAN'T know what is the effect of an additional 5,000 or 10,000 in income. This makes it real hard to give someone the incentive to working harder and make more.

>without having tax software and the details of each persons returns you simply CAN'T know what is the effect of an additional 5,000 or 10,000 in income.
Absolutely. Anyone claiming to know the exact percentage someone pays is probly wrong. You have to run the #s thru tax software to figure it out.

>This makes it real hard to give someone the incentive to working harder and make more.
Yup, also true.

And how much do we spend in non-productive time as a country dealing with the paperwork of filing. Things SO need to be simplified.

If only for the fact that people generally disagree with themselves in taxation arguments.... they will most often support flat-ish above poverty, yet think the rich don't pay enough because they don't get the system is progressive already.

Another way politicians can bs us into stupid things... because noone knows the actual answer.

The tax issue also comes down to whether one views savings or consumption as more important. It is true that someone who is a higher earner is in the position to save more of additional dollar than a low wage earner. One theory on why we're so screwed up as a country is that we don't have enough aggregate savings which puts us at a disadvantage against countries with a higher savings rate, which makes us more dependent on foreign capital. If one agrees with that, then punitive tax rates on high earners makes no sense. Yet another reason for a flat tax.

"...you simply CAN'T know what is the effect of an additional 5,000 or 10,000 in income. This makes it real hard to give someone the incentive to working harder and make more."

Sometimes people wonders whether it's worth it for both spouse to work and might run the numbers in detail to come to a conclusion. However, one can easily estimate the net increase for a 5K-10K raise to make a decision whether it's worth it to work harder (whatever that means). If the 5K-10K represent a significant percentage, then it's worth it, period. If it represent a small percentage increase, then the increase will probably net around 50% and is not likely to change how hard someone works in the long run.

"..whether it's worth it to work harder (whatever that means)"

Why is this hard to understand? A person in the sub-$60-$80k income range is the one most likely to face these very high marginal tax rates. They are also more likely to be in a job where A) they get paid hourly, and so more overtime = more pay or B) they have defined hours in which they work in which case they can take on another part-time job. In either case there is real and substantial additional effort as well as the sacrifice of more free time in order to increase their income. But if they see little net income from it then there is little incentive to work. Our tax system thus has created a DIS-incentive for someone in the middle to lower wage category to try and improve themselves unless they can A) see that there is a possibility to get beyond the "death zone" or B) can make the money in tips or some other manner they might not report.

Is that what we seek? To either drive out the desire to produce or to drive production underground?

I have to find it, but Megan McCardle had a great tax plan that started with negative taxes (you don't work, you don't gain, make $1 and you are given more) that would start with fairly high negatives and work their way slowly up to positive (the net effect of our current tax credits). But the incentive to work to make the next $ would still be there.

Or lets say a side project, a small business on the side (that could turn into a big business not on the side).

but you've created a set of facts out of thin air to support your supposition.

how does someone moving from $60K to $80K have a marginal tax of 70-80%?

you pulled that number out of nowhere.

Scroll up.

OK, I will do the work for you. here is the link: http://mises.org/daily/3822

And what I said was moving up to about the 60-80k range. Again, with a tax system so convoluted it is impossible to say what the points are for particular people and especially in different states/municipalities. Those charts are for Federal taxes. Even if you knew the details of a particular person and their location you need a computer. And that is for those of us who can work our way around these issues. Imagine someone who can't or isn't used to it. Easier for them to throw their hands up and say "I give up, let me just work 40 hours".

I know, I have seen this first hand when people think that they will make LESS money if they ear more income.

How are things this year?

Wall Street Firms Poised to Disappoint Bankers on Bonuses

Goldman Sachs Group Inc. (GS), which set Wall Street pay records when stocks surged and cheap credit abounded in 2007, is again leading the industry as markets boom anew: putting aside less money for staff and more for investors.

http://www.bloomberg.com/news/2013-10-31/wall-street-firms-poised-to-disappoint-bankers-on-bonuses.html