I was talking to a guy about his stay at home wife and how, "I am just under the next bracket, so if she works we will lose money!"
I attempted to explain that this simply isn't how it works, he couldn't comprehend that he had been wrong for 40 years of his existence.
For some reason, this particular item bugs me a lot. It probably has something to do with how much people complain about taxes, without even understanding them....
Any other stories about this topic?
Yeah, I had a long, shall we say, debate, with a co-worker in an effort to explain this one. The misconception that
marginal rates apply to
all income is extremely pervasive and difficult to reverse, even with some intelligent people.
I ended up having to actually pull up the tax tables and show him that, regardless of your income, the first increment of income is taxed at the lowest rate, and on up the scale. That finally got the point across.
The simpler way (which I tried first, but which didn't quite drive it home) is to simply show someone that on the tax tables, once you get above the first tax bracket, the amount due is NOT the same as just multiplying the marginal rate by the taxable income. It is less because you're taxed less on the portion of your income below your top bracket.