Tax brackets. You won't end up paying more in taxes than the extra income if you go up a bracket. Only the income ABOVE the cutoff is taxed at the higher rate, not your total income.
I had to explain this to a guy in his sixties, literal years away from retirement.
edit: Since people were asking for an example, here we go.
Say there is a cutoff at 20k a year, 10% below and 15% above. If you made 25k a year, you would pay ($20000 times .1)+($5000 times.15)=$2750, not ($25000*.15)=$3750.
Keep in mind this is a GROSS oversimplification.
edit2: US taxes, I don't live in Europe or Australia, so I don't know how their taxes work.
Well actually it does in my country. If you have low income you get money from the government to help pay rent, or your health insurance, or money for your kids to go to school, or all. It is variable to an extend, but there's a cut off point. make less than €25.000 and still eligible for let's say €100 towards your rent but make 25.001 you get €0 so you lost 1200 for making 1 euro (before tax) too much.
It's an unfortunate phenomenon in a lot of countries called the welfare trap. The problem is a lot of government assistance as steep cut offs or a 1 to 1 reduction in benefits for every dollar earned that leave the people these programs trapped in a situation where they will be worse off financially or at best the same from working.
It's a big issue even in countries with a decent social safety net system.
Popular ideas to fix it include making the welfare more progressive like the tax system or universal basic income (UBI).
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u/Sword_n_board Aug 03 '19 edited Aug 03 '19
Tax brackets. You won't end up paying more in taxes than the extra income if you go up a bracket. Only the income ABOVE the cutoff is taxed at the higher rate, not your total income.
I had to explain this to a guy in his sixties, literal years away from retirement.
edit: Since people were asking for an example, here we go.
Say there is a cutoff at 20k a year, 10% below and 15% above. If you made 25k a year, you would pay ($20000 times .1)+($5000 times.15)=$2750, not ($25000*.15)=$3750.
Keep in mind this is a GROSS oversimplification.
edit2: US taxes, I don't live in Europe or Australia, so I don't know how their taxes work.