Announcement

Collapse
No announcement yet.

Do marginal Federal tax rates influence your desire to work?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Do marginal Federal tax rates influence your desire to work?

    On yesterday's Diane Rehm show (https://thedianerehmshow.org/shows/2016-09-28/who-pays-federal-income-taxes-and-who-does-not), a tangent discussion twice touched upon whether marginal tax rates influenced the desire of high income individuals (doctors were mentioned as members of that category) to work. One economist argued that as marginal tax rates go higher, it disincentivizes high earners to work and people like doctors will choose to retire or work less, while the other economist argued that data did not support this position.

    There was a time when I would work as much as possible to pick up as much compensation as I could. More recently, with age (51), increased wealth, and higher marginal tax rates (my overall marginal rate is about 50%), the desire to stay up later to work, work a longer day, or take on an additional case has certainly waned, but I am not sure it is the marginal rate alone that is responsible.

    As an aside, there is a competing group in town that staffs a busy, trauma center and a hospital that has a sizable charity caseload. I have always felt that they worked about 50% harder for 25% more income, a situation that I found to be unattractive to me personally. At some point, the time, effort, and exposure is just not worth the extra dollars.

  • #2
    I think it definitely makes sense for this to be the case, however, I think its more likely people dont think about it all that much. I still hear people say things like, "I got a 50k raise" or something for such a trade off. I'm thinking that 20-25k doesnt seem like that much money for the all the reasons you mentioned. In my opinion the marginal rate has acted nicely to keep me from over extending myself as it does feel very onerous and not worth while. I guess if I had another outlet to make more money and thus another 401k, or ability to fully fund a defined benefit plan with the extra work money....maybe, but once I've maxed the HSA, 401k, etc...and can no longer keep the marginal in check I lose interest.

    Comment


    • #3


      There was a time when I would work as much as possible to pick up as much compensation as I could. More recently, with age (51), increased wealth, and higher marginal tax rates (my overall marginal rate is about 50%), the desire to stay up later to work, work a longer day, or take on an additional case has certainly waned, but I am not sure it is the marginal rate alone that is responsible.
      Click to expand...


      For now, the tax rates don't influence my desire to work.

      I'm recently graduated, am still in the accumulation phase, like my job (for the most part), and work within a lifestyle friendly field.

      I could definitely see a scenario where if I'm older, if I'm financially independent (expect to be so by 40), and hate my job, that I would walk away over higher marginal federal tax rates.

      Comment


      • #4
        This is a very common theme among our wealthier clients.  Selling and winding down businesses, deciding not to make new hires, trimming back hours or retiring altogether.  These clients tend to be older and nearing retirement age already, but most of them enjoy what they do.  These feelings amplify when they see that anything they add to their estates from now until death will get slammed with a 40%+ estate tax.  But they're already very comfortable and don't need the money.  For the young or the highly leveraged, they have no choice but to soldier on.

        It's not so much the marginal tax rate itself, but the overall cost of doing business, cost of hiring workers, etc., primarily due to taxes, health insurance, unemployment insurance, fica, increasing costs of insuring against risk, and so on.  The marginal tax rate itself is just the final insult after it's all said and done.  The marginal rate is also pretty deceptive, broken up into more pieces than it was before.

        Keep in mind that our marginal rate is still (relatively) low, historically.  If the trend continues toward 50%-70% tax rates of yore, this will only get worse and you'll have far fewer people with only earned income like doctors working those extra hours, that extra shift, those extra procedures, which get hit at full freight.

         

         

        Comment


        • #5


          On yesterday’s Diane Rehm show (https://thedianerehmshow.org/shows/2016-09-28/who-pays-federal-income-taxes-and-who-does-not), a tangent discussion twice touched upon whether marginal tax rates influenced the desire of high income individuals (doctors were mentioned as members of that category) to work. One economist argued that as marginal tax rates go higher, it disincentivizes high earners to work and people like doctors will choose to retire or work less, while the other economist argued that data did not support this position.
          Click to expand...


          Theoretically yes, it matters to people. However, it is more of a discussion point than a decision influencer. In 35 years, I've heard the marginal tax rate given as a serious excuse for not working more maybe twice.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            I think it's harder to think about tax rates influencing your desire to work when the income comes in small doses rather than one large dose.  For example, if I'm debating whether to stay late to do a $1000 procedure (and say this occurs once a week), I probably wouldn't think of its tax implications as much compared to an offer of $52k for staying late once a week to do a $1000 procedure.  While I consider the tax implications of a smaller amount, seeing a larger sum being eaten up by a large tax bill (even if it works out the same in the end) catches my attention even more and would be more likely to give me pause.  Similarly, I feel that tax rates (federal and state) can affect your decision of how hard you want to work when looking at job offers, where you have contract details and lump sum salary amounts right in front of you.

            Comment


            • #7




              I think it’s harder to think about tax rates influencing your desire to work when the income comes in small doses rather than one large dose.  For example, if you’re debating whether to stay late to do a $1000 procedure (and say this occurs unplanned once a week), you probably wouldn’t think of tax implications as much as if you were offered $52k up front for staying late once a week to do a $1000 procedure.  Similarly, I feel that tax rates (federal and state) can affect your decision of how hard you want to work when looking at job offers, where you have contract details and lump sum salary amounts right in front of you.
              Click to expand...


              Here's what happens to the marginal case. Let's say you are sitting at home on a Friday evening, and the attending from the ICU calls you and says the following:

              "There is a thoracentesis here that needs to be done, but if you want, I can do it myself."

              I have done the math in another thread (another context), but a thoracentesis professional fee is in the $100-120 range, after tax being $50-60. The procedure itself in a critically ill patient is often more challenging and complicated in a walkie-talkie, so it might take 20 mins, if the uncomplicated patient takes 10 minutes. 15 min drive each way means the procedure is going to take an hour, if everything goes smoothly. Dividing the after tax $50-60 between my twelve partners means that my net compensation is less than $5. What do you think I am going to tell the ICU attending?

              The above illustration conflates two issues, the marginal rate and the sharing of professional revenues within a group. More to the point, if I were getting the proceeds myself, what would I tell the ICU attending? Twenty years ago, I would probably come in and do the case. Today, no way.

              Now, what if it were a hypothetical $500 case that I could do in an hour on a Friday night vs. let someone else do it, to net $250 for me? Pass.

              $1000 case? Maybe.

              $2000 case? Probably.

               

               

               

              Comment


              • #8
                It's an interesting question.  I do shift work as a W-2, so I know pretty closely where I am at with income through the year and how much money I will make with each additional shift.  I realize income is still income, but for me, picking up work towards the end of the year when I'll be getting hit in the highest bracket is curiously anti-synergistic when combined with the facts that most of the family is on holiday, there are loads of parties, school is out, skiing is good, etc.  So, yes, not only do marginal rates influence my desire to work, they actively stop me from working.

                Going forward as I plan semi-retirement (a.k.a. part-time or FI-notRE), I am trying to calculate my hours/income such that I stay in a lower bracket.  Maybe even qualify for some Roth contributions.

                I've said it before and I'll say it again:  Who is John Galt?

                Comment


                • #9







                  I think it’s harder to think about tax rates influencing your desire to work when the income comes in small doses rather than one large dose.  For example, if you’re debating whether to stay late to do a $1000 procedure (and say this occurs unplanned once a week), you probably wouldn’t think of tax implications as much as if you were offered $52k up front for staying late once a week to do a $1000 procedure.  Similarly, I feel that tax rates (federal and state) can affect your decision of how hard you want to work when looking at job offers, where you have contract details and lump sum salary amounts right in front of you.
                  Click to expand…


                  Perhaps, but let’s say you are sitting at home on a Friday evening, and the attending from the ICU calls you and says the following:

                  “There is a thoracentesis here that needs to be done, but if you want, I can do it myself.”

                  I have done the math in another thread (another context), but a thoracentesis professional fee is in the $100-120 range, after tax being $50-60. The procedure itself in a critically ill patient is often more challenging and complicated in a walkie-talkie, so it might take 20 mins, if the uncomplicated patient takes 10 minutes. 15 min drive each way means the procedure is going to take an hour, if everything goes smoothly. Dividing the after tax $50-60 between my twelve partners means that my net compensation is less than $5. What do you think I am going to tell the ICU attending? ?
                  Click to expand...


                  In that particular case I'm with you, if I had to actually leave my house and go in for that amount, no way.

                  Comment


                  • #10
                    It ABSOLUTELY makes a big difference.  Those "studies" that say that it is theoretical, but in practice people work the same are bunk.  I can think of several examples where it has influenced me.

                    1) I am far less likely to pick up moonlighting shifts, knowing I will lose 45% of it, unless I can find a way to squirrel it away in a solo 401k.

                    2) I am more inclined to cut back to part time earlier.

                    3) I am more willing to sock away more into my cash balance plan to avoid taxes now and thus retire earlier and work less.

                    People may not be financially or tax savvy as on average, but a large enough percentage considers the tax bite when making these decisions that in aggregate in makes a huge difference.

                    I would wager to say that if the US ever converted to a flat tax, there would be an explosion of work and productivity almost immediately.

                    Comment


                    • #11




                      Here’s what happens to the marginal case. Let’s say you are sitting at home on a Friday evening, and the attending from the ICU calls you and says the following:

                      “There is a thoracentesis here that needs to be done, but if you want, I can do it myself.
                      Click to expand...


                      This is absolutely the same way I tend to consider it - on the margins of my normal work day/expectations.  As a W2 employee there is definitely a max income I really don't care to exceed because it's hard for me not to consider how little income I'm taking in for that extra work. I'd rather trade that potential income for time. Maybe if I was a practice owner and had more avenues for squirreling money away?

                      Also, what I've found when I bring this up to my fellow W2 colleagues: they look at me like I just spoke a foreign language. It's my experience very few people think about these things and how they impact their everyday lives.

                      Comment


                      • #12
                        I think where this matters (it did for my family) is when there is a two income family. My wife is a physician and she decided to 'retire' to become a stay at home mom  (arguably a much harder job anyways). The decision was not all financial, but it was influenced. When the effective tax rate on her income became over 50% is just didn't make sense. There was no financial incentive to work, especially after child care, commuting costs and embedded costs in being a physician were added in. Most people don't do the math, they just look at income and don't look at expenses (tax is an expense, just like buying clothes for work). Had her job been the perfect situation she would probably still be working, even for pocket change, but she couldn't justify the hassle.

                        Comment


                        • #13
                          Nope. I just don't want to work more. It has nothing to do with the money or taxation!

                          Comment


                          • #14




                            I think where this matters (it did for my family) is when there is a two income family. My wife is a physician and she decided to ‘retire’ to become a stay at home mom  (arguably a much harder job anyways). The decision was not all financial, but it was influenced. When the effective tax rate on her income became over 50% is just didn’t make sense. There was no financial incentive to work, especially after child care, commuting costs and embedded costs in being a physician were added in. Most people don’t do the math, they just look at income and don’t look at expenses (tax is an expense, just like buying clothes for work). Had her job been the perfect situation she would probably still be working, even for pocket change, but she couldn’t justify the hassle.
                            Click to expand...


                            We took a different tack on this. When the children were young, my wife (attorney) took a part time independent contractor role that initially paid her little more than taxes, child care, SEP IRA contribution, and her cellphone. It allowed us to milk her career along. After six or seven years, when the kids were off to full day school, she took a full time corporate job that has provided an unexpectedly nice income with a generous benefit package and reasonably flexible hours. Had she dropped out of work when the kids came along, she would not have had the opportunity to work for this company and likely would have been finished in the legal field.

                            This has worked out very well for us and has allowed me to have much greater flexibility than I would have had otherwise.

                            Comment


                            • #15




                              Nope. I just don’t want to work more. It has nothing to do with the money or taxation!
                              Click to expand...


                              This is certainly part of the equation for me.

                              Comment

                              Working...
                              X