jpahk wrote:as a concrete example, suppose you make $50k, then you get a $1000 raise that causes your tax rate to increase by 1%. you are paying roughly an extra $510 in taxes (1% of your new gross income, $51k, plus some percentage of the extra $1000) . . .
The mistake that you, and presumably a large portion of the general public, are making is assuming that the increased tax rate applies to all
of your income. It does not. Our progressive tax only applies progressively higher tax rates to that portion of yearly income that is above each threshold. In your example, if you start with a tax rate of X, and then say that you get a $1000 raise that increases your tax rate by 1%, what that really means is that only the portion of income above the threshold is subjext to a tax rate of X+1%. All of your "old" income is taxed as it was before. Therefore, unless you were already paying 100% tax, any amount over the threshold, no matter how heavily taxed, represents increased takehome pay.
To be more explicit: suppose you make $50k and it is taxed at 25%, and suppose further that anyone who earns $50,001 or more is pushed into the 50% tax bracket. Getting a raise of $1000 does not increase your taxes from $12,500 ($50k x 25%) to $25,500 ($51k x 50%). Instead, the first $50k is taxed at 25%, as it was before, and the $1000 raise alone is taxed at 50%, so your taxes go to $13,000.
Under this system, no increase in income can lead to a decrease in take-home pay.
jpahk wrote:now, i don't know the tax code inside and out, and it's possible that it's been designed so this can't happen.
Note, however, that our tax system is not that cut-and-dried. In addition to our progressive rates, which are simple and straightforward and do not cause loss of take-home pay with increasing income, we also have a number of tax credits and deductions which vary according to adjusted gross income, as well as an alternative minimum tax which can sometimes impose additional tax based on non-adjusted gross income. Thus, while the progressive tax alone can never lead to loss of take-home with increased salary, there are some odd scenarios in which an increase in salary could conceivably lead to enough losses of credits and deductions that there is a net loss of take-home. I don't know the numbers but I would expect such scenarios to be very unusual; the taxpayer would not only have to be in a position to receive multiple income-dependent credits and deductions but would also have to be right on a threshold at which each of them would be affected by a slight raise. Also, if an increase in salary is enough to cause the alternative minimum tax to kick in, it's conceivable that the increase in tax could exceed the amount of the salary increase -- I don't know the numbers well enough to know if this actually happens in practice, but it's obviously a different kind of scenario because it involves moving from one tax regime into another.