Tax progression myths

[Michael]

I repeatedly hear the story that someone got a pay raise and then was "classified in a higher tax progression bucket", in the sense of as if there are discrete jumps in the taxation percentage which would mean it is sometimes earn 100.- less but thereby save more than 100.- in taxes.

As far as I know this is a myth that is just not true, and that no place in CH this would actually work, because progression is not discrete but continuous.
Are those people just looking at tables provided by the cantons and thing whatever is between the rows means no progression?
Or am I missing something?

On a similar note, wealthy philanthropes are often "criticized" in the public of only "donating for tax reasons". Yes, donations can be subtracted from the taxes, but in the end there is still less money in the pockets, no?

 

[Baptiste Wicht]

It's indeed a big myth. I have heard repeatedly people telling me that earning more can sometimes be a net loss, but as you said this is not true.

It is true that there are brackets and each bracket has a higher tax rate. But going into a higher bracket does not increase the tax rate for the money below the bracket, only above.

Yes, donations are interesting, but it's still a "net loss". It will reduce their taxes, but it won't make them money. And if there was no tax-incentive to donating money, there would be much fewer donations.

I have touched on this in this article:

Your Marginal Tax Rate And All You Need To Know About It - The Poor Swiss

Your marginal tax rate is an important metric that will help you know how much taxes you are going to pay for more income and more!

thepoorswiss.com

 

[Michael]

Oh, I indeed missed that article! I've read it through and it makes much more sense now, thanks!
Do you see a reason why there are brackets and it is not just continuous? Sure, might be easier to calculate/explain, but since I can't find any public lists of actual tax brackets (e.g. for Zurich) and only get info via the official tax calculators, the calculation could as well be "fair" and continuous.

 

[Baptiste Wicht]

What do you mean by continuous? Like 5% of everything? It would probably not be fair because the percentage would need to be higher than now and low income would pay more taxes.
If you mean a function to define the percentage based on income, it could be done, but they probably did not find a good function that fit their brackets.

Normally, you can find these tables for each canton. But in most cases, you need to search in the language of the canton to find them.

 

[Michael]

Yes I mean a function so you don't have discrete limits but every 1.- more gives you x% higher marginal tax rate.
That way at the beginning of a bracket, you will have a lower tax rate than at the upper end and it goes "continuously"/smoothly over to the next bracket, so you would basically have no brackets anymore.

If it wouldn't fit the current brackets it could just be adjusted so overall tax income stay the same but for some people it will go up and for others a bit down. But I guess it's hard to implement because if you have to raise taxes for some you will make yourself quickly unpopular, even if others pay less.

 

[Baptiste Wicht]

They probably have not found a good function to represent what they want to achieve. Or they are not good at math

But, in many cases, such a function could work and would be simpler (if you can find a simple function to do it). It may be a bit more difficult to explain to people, though.