Why are the tax/income levels so random? Sometimes there’s a 2% increase between levels, and sometimes 10%. The first tax bracket is until $11k, but the ones after that seem completely arbitrary.
Is there a reason for these amounts? Wouldn’t it be simpler/better to just have even numbers?
In: Economics
Nothing shows how the sausage gets made like the US tax code. Once you understand that federal law is a hodge podge of compromise, special interest lobbying, and changes heaped up changes across generations of legislative sessions the fact that it doesn’t make sense starts to make sense.
Few things are as political as taxes. And it’s best to realize all the seemingly random things are a result of negotiations, lobbying, and political compromise.
There’s no practical need for them to be “nice and even” numbers, they are chosen/indexed to create a gradual change as taxable income increases. Keeping the rates lower for incomes below $100k benefits the middle class greatly. (it takes about $130k gross income to owe more than 10% of your total income in federal taxes for a married couple, and that’s a pretty comfortable income for a family in most of the country.)
I think they get adjusted every year for inflation. So, if they decided to use even numbers this year, they become “random looking” next year.
If I was in charge of this aspect of tax policy, I’d replace the bracket system with a single calculation that tells you how much tax you owe, tweaked so it gives approximately the same numbers as the bracket system.
They may seem random, but there’s actually a few reasons.
1. The lower steps (lower income) have smaller jumps because a tiny jump in income for someone barely making ends can make a big difference in their quality of life. Say you earn $10K and the tax rate goes from 10% to 12%. The extra 2% translates to $200 only. But for someone on a tight budget like this, let’s say a single mom, this could be the difference between grocery shopping or not in a fortnight.
2. At the richer end of the spectrum, the higher steps, a small increase does not matter as much. Say someone makes half a million a year. Their tax rate goes up from 32% to 34%. The extra 2% is a much bigger dollar amount, but proportionately the hit is smaller to their overall income. More importantly, the hit to the quality of life is negligible. E.g., the difference between staying at a 5 star hotel with a perfect rating on Tripadvisor versus a 4 star hotel with great rating.
3. As for the seemingly random starting point, $11K as OP said, this is because the government exempts a certain amount of income everyone needs for basic necessities. This is also inflation adjusted, which makes it even more unlikely to touch a round/smooth number.
Tax brackets change every year to reflect inflation. Even if you get a nice “even” number one year (like we did in 2018 when the single filer 35% bracket was $200k and up and the 37% bracket was $300k and up), that number isn’t going to stay nice and even the following year. The brackets do tend to be rounded to a multiple of $25, but rounding at a less granular level than that (to the nearest $100, $1000, etc) could result in billions of dollars more or less in revenue collected for the government, so there’s no sense in rounding just to get a pretty-looking number. Computer programs and calculators don’t really care if a number is easy to read or not.
Location may help add context.
For example, in Canada there are two different marginal scales in effect. Federal and provincial. They have different step sizes and different brackets for each marginal level.
Although the margins look pretty arbitrary, you’d find that independently the federal and provincial margins span broad ranges and the step sizes aren’t all over the place. If you combine them though you end up with roughly double the number of margins, and the step sizes a wide variety. The step sizes are directly traceable back to the independent federal and provincial margins two sizes, but overlaid they look scattered.
This likely covers at least part of the oddity you may be seeing if you’re looking at some kind of combined marginal taxation system.
The brackets not nicely aligning with even numbers is often tied back to inflation increases.
Other oddities can probably be traced back to politicking, lobbying, and budget increases necessitating tax increases, although you’re then talking about individual provinces or states so the specifics are going to vary dramatically.
Combination of things like percentage increases to income levels on brackets — eg. might have been set at even levels but then they get increased based on CPI increases or something similar so $40k with 3 years of 3% increases becomes $43,709.
Percentages are likely the result of some income-tied reason for levels, combined with political negotiations and such.
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