By Dr. James M. Dahle, WCI Founder
One of the most important principles of economics is that people respond to incentives. That makes it unfortunate that there are so many things in life that incentivize us to earn less money. These “perverse incentives” or “moral hazards” can result in lower tax revenues, fewer goods and services available, and less general prosperity. As a general rule, you incentivize what you want to see more of (classic examples in our economy are education and healthcare) and you tax what you want to see less of (tobacco and alcohol, for instance.) Since we tax income, that results in, you guessed it, less income.
However, there are far more incentives to make less money than just taxes. Today, let's go through all of the ways we are incentivized to make less money.
#1 Lower Marginal Tax Rates
The most noticeable way that we are all penalized for making more money is that additional income is taxed at ever higher rates. If you earn $30,000 and make an additional $100, you lose $10 or $12 of it to the taxman. If you earn $3 million and make an additional $100, you lose $37 of it to taxes. It isn't JUST that you pay more taxes, it's that you also pay a higher percentage of your income as tax. I'm not saying this is right or wrong; I'm simply pointing out that this is the way it is, and it has consequences.
More information here:
#2 Free Capital Gains
Lower earners don't pay capital gains taxes. At all. Make less, pay less.
#3 More Tax Credits
The less money you make, the more tax credits you become eligible for. Here is a list of common tax credits:
- Earned income tax credit
- American opportunity tax credit
- Lifetime learning credit
- Child and dependent care credit
- Child tax credit
- Savers tax credit
- Recovery rebate credit
- Adoption credit
Many of my readers are phased out of most or all of these credits. If you make a million bucks a year, you don't get any of them.
#4 More Tax Deductions
It isn't just tax credits that get phased out. You do for tax deductions as well. Consider these common deductions that get phased out at higher incomes:
- Student loan interest deduction
- IRA deduction
- Education tuition and fees deduction
- Property and state income taxes (higher earners generally have more property/state income taxes, only $10,000 of which can be deducted)
- 199A deduction (for specified service industries)
#5 PPACA Subsidy
Bought health insurance on your own? Then, you're probably aware that it is MUCH cheaper for some people than others. For example, a family of four with an AGI of $40,000 gets a $4,618 per year subsidy to help offset the cost. A family of four with an AGI of $140,000 doesn't get squat.
#6 Medicare Part B IRMAA
Whether you call it a subsidy for low earners or a fee for high earners, the Medicare Part B Income Related Monthly Adjustment Amount (IRMAA) means that some people pay $6,060 more for Medicare Part B than others do.
#7 Lower IDR Payments
Income Driven Repayment programs like IBR, PAYE, and REPAYE are based on, well, income. The higher your income, the higher your payments.
#8 Lower REPAYE Subsidy
If your calculated REPAYE payment becomes larger than the accrued interest on your student loans due to a higher income, then you no longer get your interest rate subsidized.
#9 Additional Forgiveness
Whether you are going for PSLF or IDR forgiveness, the lower your payments, the more of your loan that will still be left to forgive. With IDR forgiveness, the tax on that forgiveness is also lower due to your lower marginal tax rate.
More information here:
Student Loans 101: Ultimate Guide to Student Loans
#10 Pell Grants
Pell grants to pay for college are not available to high earners and their children.
#11 More Private Financial Aid
Colleges and other entities that offer scholarships, grants, and loans often restrict most of those to people with a calculated need. Some elite schools don't charge tuition at all to students from families with less than a certain income.
#12 Fewer Government Support Programs
Nobody should be surprised, but high earners don't qualify for government programs designed for the poor, including food stamps, Medicaid, CHIP, Temporary Assistance for Needy Families, supplemental nutrition assistance, housing assistance, Supplemental Security Income, or Social Security Disability (only earned income counts).
#13 No Estate Taxes
While not specifically phased out for high earners, high earners are far more likely to build wealth than low earners. Estate taxes really incentivize you to not build wealth, not necessarily to earn less money. But they're pretty closely related activities.
More information here:
Estate Taxes: Federal, State, and Inheritance Tax Rules Explained
#14 Can Contribute Directly to Roth IRAs
High earners can still contribute through the Backdoor Roth IRA process. But some high earners can't do that because they'll get pro-rated, and there are other high earners who can't seem to do the workaround properly.
#15 Can Contribute Directly to Coverdell Education Savings Accounts
While 529s have no income limits on contributions, ESAs do. OK, this isn't a big deal, but it is one more tiny incentive to earn less.
#16 Ability to Use Savings Bonds for Education Tax-free
Guess who can't cash out their savings bonds without paying taxes on the earnings if the proceeds are used for education? That's right, high earners.
#17 Payouts from Stimulus Packages
Remember that stimulus check you got in the spring of 2020 and 2021? Me neither. Again, not saying it's right or wrong; it's just the way it is. One more way you are incentivized to earn less.*
*To be honest, business owners generally received far more money than their employees as part of these packages. Those people are generally, but not always, higher earners. I'm sure there are at least a few people out there that got both types of stimuli-personal and business payments.
#18 Social Security Income Taxation
Eighty-five percent of Social Security income is taxable. Unless you earn below a certain amount. Then, it is tax-free. At least it's not 100%.
#19 Additional Medicare (PPACA) Taxes
High earners pay an additional tax of 0.9% of earned income and 3.8% of unearned income.
#20 People Hate You Less
There are a lot of people in this country that really, really hate “the rich.” They don't necessarily define it by whether the rich are wealthy or whether they are high earners, but it honestly doesn't matter, does it? Here are some examples:
Some people just want to kill the rich. However, others won't stop there. They actually want to eat them, too. Even high earner Steven Tyler wants to partake in that activity. People got especially hungry during the meme stock phase of 2021.
I found these hashtags somewhat fascinating. I actually searched to see if anybody was advocating for killing and eating the poor (they weren't, at least not for the last few centuries). Granted, a large percentage of these people are presumably joking and/or speaking metaphorically. But it only takes one.
At any rate, this is one great incentive to earn less. You can “fit in a lot better with regular people” and nobody is going to try to kill or eat you. Envy can be ugly—and maybe even violent too.
Getting Real
OK, let's get real here for a minute. Yes, there are A LOT of ways in which you are incentivized to earn less. Even very wealthy people respond to these things. Just read a few FIRE blogs for a couple of months, and you'll find bloggers showing you how to get PPACA subsidies, avoid IRMAA fees, and score Saver's Credits. But the truth is that there is also a lot of incentive to earn more. The main one is that when you earn more, you have more. Remember that extra $37 in tax that the million-dollar earner had to pay for that extra $100 in earnings? They also got to keep $63. They could do anything they want with it. They can spend it, save it, invest it, or give it away. In fact, if they give it away to charity, they don't even have to pay that $37 in taxes on it.
I definitely prefer the financial freedom, security, opportunities, and ability to help others that come with being a high earner—despite the plethora of incentives to earn less.
What do you think? Did I miss any other incentives to earn less? Have you changed any of your habits or plans in response to these incentives? Comment below!
There are certainly many incentives to earn less…and some to earn more. Your post brought up several disincentives I was not aware of. Incremental discretionary income comes at a cost for most people. The cost is trading more time (life hours) for money.
Every hour of life I spend pursuing more income is an hour of leisure I did not get to enjoy. It’s rare that a work hour is as enjoyable as leisure. I have known people who like their work as much as leisure activity, but not many. I do not.
Now that I’m semi-retired, I value my leisure time even more as I have tasted total freedom. When my two work days or a quarterly long inpatient weekend roll around, I get through them, but am thinking of being free again. Don’t get me wrong, I do the work to the best of my ability, but I am always happy to get back to total freedom. It can’t be beat. It really is “all that and a bag of chips.”
For me, the tax jump from 24% to 32% was one of the largest disincentives to trading more life for money to have “more freedom, security, and ability to help others.” It kicks in at $340K for married couples. I will be dropping from the 32% bracket to the 22% bracket in 2023 due to my much smaller tax footprint from working much less by choice.
I have plenty of “not working” to do. I’m doing more hiking, swimming, writing, reading, traveling, and spending more time with my children.
My inpatient side gig pays well. I can always do more of it. I can choose to trade a few days of life for money. Right now, I do it once a quarter. I used to work most holiday weekends. Since it goes on top of my W2 wages, and is also subject to self employment taxes, it is stepped on with a huge tax foot….Bigfoot size. I have some deductions against it, but with paid malpractice, these are mostly lodging, some travel food expenses, health insurance premiums, and mileage. Sometimes, I think it’s not worth the net income after taxes and expenses, but it pays for more travel and I like eating at restaurants.
Having already worked 40 of my 58 years (I count ALL my work years, the last two years of medical school and all of residency), I’m happy to work just two days a week, and I think even that will not last. Total freedom is simply better. Freedom and leisure beats work badly, hands down. That’s a big disincentive to work. Always has been.
Surprisingly, about two-thirds of employed Americans say they would keep working even if they won $10 million in the lottery. I always thought most people would quit work if they won the lottery. I guess I’m in the lazy third, or the group who can find enough meaning outside of work.
I found this quote: “These high percentages of people who plan to keep working have remained relatively constant over the years: A study published in 2010 in the Journal of Applied Psychology found that from 1980 to 1993, an average of 73% of workers in the U.S. said they’d keep working even if they no longer needed to for financial reasons; from 1994 to 2006, roughly 68% said the same.”
In 2023 when my voluntary wage drop kicks in fully, it will be interesting to “see what I qualify for” that I didn’t in the past due to working two jobs and twenty weekends a year to be a “high earner”. Along the way, I took note of many things that did not apply to me as a “high earner.” Thanks for the comprehensive list.
Yes, I talk to physicians all the time about the time cost of money and how dumb it usually is chasing more loot in a rat race/debased system such as we have. Think of a single person also when you nailed this one, Huck:
“For me, the tax jump from 24% to 32% was one of the largest disincentives to trading more life for money to have “more freedom, security, and ability to help others.” It kicks in at $340K for married couples. I will be dropping from the 32% bracket to the 22% bracket in 2023 due to my much smaller tax footprint from working much less by choice.”
It’s 163k!!!
You’re basically incenting me to work half the year and enjoy life since you are so outrageous and covetous with your centrally planned nonsense and abuse of people who actually do work hard(er).
As it turns out, I have no problem with this and actually will go to places where the USD is strong, and women are pleasant/not fat.
Its not that people hate the rich, its that they hate themselves for not being rich. Its jealously. Its anger at themselves. Just like that bully in school picking on their victim is never about the victim, it is always about the bully and dysfunctional social issues at home. I’m pretty sure nobody would argue with someone giving them a few million dollars and then they would become rich (other than the Joker)
Yes, they fall prey to the demons of the world as the main principle of leftism is covetousness. It is not a coincidence that they also tend to hate God, or religious traditional people who are normal, unlike them. I pray for them as they are unaware of how influenced by the evil entities of the world. Ego is an issue for all of us, but if any of these “poor people” got rich all of a sudden they’d do nothing any different as a person they currently complain about, as a rich person. Ego as a loser is just as dangerous as a rich person, with the only difference being they have much less, or nothing, to lose.
I am retired, U.S.A
Army, and I make a fairly good income, but still lower middle class. I also scrimped, saved and invested so I could enjoy retirement. I listened to the so called experts at the time, and put most of my saving in the TSP and IRS’s, only to find I will now be in a higher tax bracket, when I start cashing it in. I have converted some to Roths, but that also puts me in a higher bracket, and now 85percent of my S.S is taxed. A large percentage of the population did not prepare, and I realize a few do did not have the opportunity, but most simply chose not to take advantage of opportunity, and instead chose to enjoy their leisure time and now rely on the government to take care of them. You hit on all the free or reduced things these people now get from the govt. One example is Medicare, I. My state, if you are low income, the state pays for your Part B, while I must pay for mine, even though I was promised lifetime free healthcare by the military (The govt decide to make military retired use Medicare, although Tricare does pickup much the extra charges). The government, especially the liberal left, know who keeps them in office! They also know that these people have a real interest in keeping them in power. The Student Loan payoff is just the latest example, and is unthinkable a time when military recruitment is at a low point. This a primary reason people are choosing not to work.
The full phrase, by Jean-Jacques Rousseau, is “When the people shall have nothing more to eat, they shall eat the rich”. Apparently it’s from the 18th century. Interesting that this phrase is making a come back.
This was actually the most useful comment in the comments section (after several of just complaining or talking politics). I’ve wondered where such an odd phrase comes from, but now it makes sense. Thanks
The comment above that suggests people hate the rich due to jealousy as a type of projected hatred of the self prompted a search.
I found this on Quora with >150 answers, and it appears there may be more reasons:
https://www.quora.com/Why-do-people-hate-rich-people?share=1
If the link works, reading the answers might be interesting. It seems “the rich” is hard to define, but skews towards tens or hundreds of millions, not the few million most doctors have after thirty years of work. The phrase “millionaires” may not capture “the rich” as well as “the 0.01%”.
How would you define a “rich” or “wealthy” person in 2022 Huckleberry? It’s obviously a combo of what cash flow and investments one has, probably around what, 1 million for single and 2 million for family?
In general, what do you think the number that a single person can retire at? I’d like to hear the family number too, but it tends to have more variables or excuses to raise the number (wife, kids, future, etc).
It depends how you plan and where you live in retirement. I accumulated my assets while working in California, at a 13.3%, but moved to Arizona when taking distributions, at 4.5%. Part of my pension and deferred comp escaped California tax because of the Source Tax provision in the IRS code. Over my career I developed three buckets of money, one taxed at ordinary income (pension, deferred comp etc.), another at capital gains (stocks, real estate etc.) and one tax free (Roth, life insurance etc). In my cash balance pension plan I used a tax deferred asset that I rolled out after five years so those payment are tax free. When I sold my original firm I put part of it in a charitable reminder trust so I didn’t pay tax on the stock, diversified and take a life time income mostly capital gains. It’s not how much you accumulate it’s how much you keep. Tax planning is key. I will discuss some of these concepts at the 2023 annual meeting.
On the opposite side, one way you are incentivized to earn _more_: no social security withholding on earnings above $147 K.
Excellent point.
Crazy and true. I was caught in this in many ways but a small example is that I know longer qualify for the savers credit bc my income went up dramatically the last few years lol. I looked at that as a good sign. This the country we live in. I still prefer to be on the side of having power & more money.
Their are opportunities out their for everyone. You would think it’s common sense to model success but so many people are just letting their laws pass them by smh.
We need to be a nation of goal setters and innovators. This would fix many of the poverty issues and government could allocate budget to something else.
Counterpoint: The many tax saving strategies, IRAs, 401ks, Roths, back door, donating appreciated securities, etc. are nearly useless to people in a low tax bracket. But the more you earn, the more valuable they are.
In consideration of this extensive list of misfortunes, how many of us would turn down an offer to double our salaries?
Very few. You almost always still come out ahead when you earn more.