A shocking number of people don't understand how a progressive tax system works. They think that if they go up to the next tax bracket, they pay that tax rate on all of their income, not just the margin. So these people think the interest deduction saves them money overall by keeping them in a lower tax bracket.
Yes. I was especially confused as a kid when I was told by several different grown ups that exact thing. It wasn't a misunderstanding on my part, because I probed them to get answers because it didn't make sense to me. They explained it to me that if they worked over time, they made more money, which bumped them into a higher tax bracket, which meant they take home less money overall than if they had not worked over time (not just pay more taxes).
Great description of what I have heard people "grown-ups" say, too.
Why this wide spread fallacy in thinking?
Could it be that because of increased marginal tax rate, your
hourly pay, net of taxes, on overtime, can be
less than your hourly pay next of taxes on the first 40 hours of work.... because your basic 40 hours includes all your regular deductions, so your next tax on the first 40 hours is quite low, but fully taxed on the overtime pay.
At this point, people say to themselves -- work overtime for only $25 per hour in my pocket, instead of $30 per hour during normal hours?
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Thoughts? I am giving the "grownups" too much thinking credit?