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
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.
Latest Answers