Why do people not understand tax brackets?

[Wezmon]

Is it possible it used to work differently and people dont realise? The UK stamp duty (tax on buying a house) used to work that way until 2014.

[PosPosPos]

It should be. There should be an entire semester senior year that is personal finance specific. Taxes, loans, balance a checkbook (heh aged myself), insurance, etc... Stuff people should know once they decide to leave moms basement and start life and not have to learn through trial and error.

The world should be a better place and people should be less shitty to each other.....lots of "should"s in this world darling.

[Spectral]

Two big things:

1) Gross innumeracy and financial illiteracy - The median person is staggeringly ignorant of finance and struggles with the most basic elements of math and arithmetic. Many, maybe most, people don't understand credit, taxes, deductions, compounding interest, budgets, or much of anything else about how to run a household's finance. This is further compounded by the inability to do quick arithmetic and a lack of desire to even try.

2) Motivated reasoning - Combine (1) with a set of political beliefs that amount to "those government types are always trying to screw guy's like me" and you'll find them believing that any change is intended to hurt them. This is true even for things that are plainly net gains for people at their income level. This one is actually somewhat understandable - if you're not the sharpest and struggle with financially literacy, it's understandable why someone would go around assuming that people who start in with numbers are just trying to take advantage of them.

[Flarelaine]

Am I the only one that can see the irony here?

Hint: Teached.

Calling out grammar mistakes of other posters who may or may not be native speakers of English is infractable. This post is on the light side of it and is somewhat in context, but please bear this in mind.

[Jonnusthegreat]

Because most systems that are legislated are deliberately created to be cumbersome and confusing.

My ideal tax system would fit on one page of paper.

[Sylvandoh]

They think they can't go over a certain amount of income or they'd be losing money because they have to pay more taxes.

Why do they not understand that they are only paying tax on the money that is earned beyond the bracket limits and not paying that tax on all their income?

Yeah, because the US tax system is the only tax system there is.

[Endus]

Its simple. Its never teached at school for a reason.

They want you to be stupid.

It is taught in schools. You covered percentages, right? That's the only math in play, here.

And you're taught to apply math to problems, via word problems and such. I've never seen a math curriculum where that wasn't a core element.

You not bothering to apply what you've learned is not public education's fault. It's willful ignorance.

[freezion]

It is taught in schools. You covered percentages, right? That's the only math in play, here.

And you're taught to apply math to problems, via word problems and such. I've never seen a math curriculum where that wasn't a core element.

You not bothering to apply what you've learned is not public education's fault. It's willful ignorance.

Eh, while you are taught math, then i don't really know any school that teaches you how the tax system is structured.
Hence why a lot of people don't know what tax brackets are, or how they work. they just think ''i earn X, which means im suddenly taxed at a higher % than before'', without knowing that it's only the amount within the second bracket that's taxed higher.

But that navigating the tax system is not taught at schools, is not some malevolent conspiracy to keep the public stupid.
knowing general math and how to navigate the tax system is two different skillsets.

[Endus]

Eh, while you are taught math, then i don't really know any school that teaches you how the tax system is structured.
Hence why a lot of people don't know what tax brackets are, or how they work. they just think ''i earn X, which means im suddenly taxed at a higher % than before'', without knowing that it's only the amount within the second bracket that's taxed higher.

But that navigating the tax system is not taught at schools, is not some malevolent conspiracy to keep the public stupid.
knowing general math and how to navigate the tax system is two different skillsets.

The complexity to the tax system is in knowing which deductibles and exceptions exist and when/how to apply them, not in understanding a concept like tax brackets.

If you know how percentages work, you can understand tax brackers. It takes like two sentences to explain this, with a table showing the brackets themselves. It's dead simple.

[StillMcfuu]

They think they can't go over a certain amount of income or they'd be losing money because they have to pay more taxes.

Why do they not understand that they are only paying tax on the money that is earned beyond the bracket limits and not paying that tax on all their income?

Where I believe this comes from is when it comes to 401k and other before and after tax contributions. Some 401k/retirement are odd in that only straight time hours are eligible for contributions and/or company matching. To which that employee is indeed getting "paid less" for overtime hours if you overall consider 401k contributions to be apart of your overall earnings.

[Jessicka]

They think they can't go over a certain amount of income or they'd be losing money because they have to pay more taxes.

Why do they not understand that they are only paying tax on the money that is earned beyond the bracket limits and not paying that tax on all their income?

It's a myth perpetuated by rich people who oppose higher tax brackets, exploiting peoples general lack of understanding of the system.

- - - Updated - - -

The complexity to the tax system is in knowing which deductibles and exceptions exist and when/how to apply them, not in understanding a concept like tax brackets.

If you know how percentages work, you can understand tax brackers. It takes like two sentences to explain this, with a table showing the brackets themselves. It's dead simple.

You can understand them, but they're just never properly explained to them. It can be a matter of years between leaving school and doing percentages, and getting a job, then going into a higher bracket and having to worry about it. And when you're surrounded by people who are no better informed than you are, it creates uncertainty.

And, like I say, rich people like this myth to persist because the benefit directly from it, through persuading poorer people to oppose it while they're 'aspiring' to rise into those brackets.

[horbindr]

stuff like this is why there needs to be a highschool class for taxes, mortgage, rent, buying a car, insurance, etc.

[Thekri]

Great job proving the OP's point.

It's still a progressive tax system like in the US. In 2018, the first 9,000EUR has no taxes, more than 9,000EUR up to 54,949EUR is taxed at 14%, and over that (up to 260,532) taxed at 42%.

So if you made 54,500EUR the year before, you'd pay 6,370EUR in taxes (leaving you with 48,130EUR). If you made 56,000EUR the year after, you'd pay 6,874.28EUR in taxes (leaving you with 49,125.72EUR). The point of the article is that the 1,500EUR raise will result in less than 1,000EUR after taxes...which is common in all progressive tax systems. The Economist is going after Germany because the tax rate difference between brackets jumps so harshly...so an easier punching bag, but to anyone who actually understands what is going on, The Economist's point is so weak as to be non-existent.

In absolute terms, yes. But that doesn't apply to buying power, which is what that article is about. If raises only match the level of inflation, then progressive tax setups will lower buying power year over year, even though the actual amount of money earned will go up.

Lets say inflation is 2% per year. Your employer gives you a 2% raise at the end of each year to offset it. So you will have 2% more money before taxes then you had last year, but identical purchasing power. HOWEVER, that 2% increase will be taxed at the highest tax bracket you pay in, because it was an increase over the last year, so you will always pay more taxes on the increase then you do overall.

So after taxes, you might only have 1.2% more money then you had last year, but the purchasing power you have will have dropped by 0.8%. Yes, it is still obviously better then getting a 0% raise (In which case you would have 2% less purchasing power), so it isn't like you are poorer for the raise, but it is still hurting you. And that is what that article was about, which is a different problem then the one the OP is talking about (People not understanding how brackets work). It could be fixed by automatically adjusting the bracket thresholds to inflation rates though, which they absolutely should do.