Laffer Curves and Tax Cuts: What Does It Take to Kill a Zombie?

I. The Theory: Laffer Curves, Supply Side Tax Cuts, and Demand Side Tax Cuts

We are hearing a lot these days about the lessons of the Reagan tax cuts. We are also being treated to a revival of the Laffer Curve. Which is... interesting.

There are two basic arguments for using tax cuts to stimulate the economy. One is the supply-side version: that's the argument that cutting taxes for high earners will cause them to invest more in the economy, which will ultimately produce more jobs. You may recall this as the "trickle down" theory, later rebranded as the "rising tide lifts all boats" ideal. This argument makes sense so long as two things are true: that the economy is being held back by a shortage of capital available for investment, and that high earners are being held back from investing because they do not have the money to do so. Given that we are currently in a situation in which corporations are sitting on record amounts of uninvested capital and have just recorded the most profitable quarter in all of American history, it's a little hard to see how those descriptions apply. The demand-side approach to tax cuts favors cuts for low and middle earners, in the hope that they will spend the extra money and thus stimulate the economy; this is essentially using tax cuts as a form of Keynesian stimulus. That argument makes sense so long as two things are true: that the economy is being held back by a lack of demand, and that there are lots of people who would buy more things if they had the money to do so. In the current economic climate, that seems like a fairly plausible pair of assumptions.

But! The Laffer Curve provides supply-siders with a different explanation for why tax cuts for high earners will stimulate the economy. Laffer's curve describes a theory about human motivation. It goes like this. Suppose you have someone earning $100 a year and paying 25 percent in taxes. That is, he gets to keep $75 out of that $100. Now suppose he has an opportunity to earn $120 next year, but the tax rate on that next $20 will be 35 percent. Laffer argued that a certain number of people would rather not earn that extra $20 if they only got to keep $13 of it -- they would rather earn $100 and take home $75 than earn $120 and take home $88, maybe because there is extra work or risk involved in earning that next $13. As tax rates get higher, the number of people who are unwilling to earn more money if they will have to pay higher rates on that additional income goes up. At a certain point -- the tipping point in the curve -- cutting tax rates at the top of the scale will persuade enough people to be willing to make more money who otherwise would have refused to do so that the total tax revenues received will go up. Laffer never claimed that tax cuts will always result in increased revenue -- it all depends on where you start on the curve. (To see the theory explained in Laffer's own words, go here.)

George H.W. Bush called this "voodoo economics," and it's not hard to see why (not that liberals talking about health care reform are above engaging in a bit of voodoo economics of their own.) On the one hand, it's hard to quibble with Laffer's contention that many people would decline to earn more money if it were going to be taxed at a rate of 100 percent -- it's what happens at other levels that becomes a matter for speculation, and perhaps some historical evidence.

II. What Are Actual Tax Rates?

There is something very strange about the way both Democrats and Republicans have been framing the conversation about tax cuts. The question a month ago was whether to retain all of the Bush tax cuts (the GOP's position), or only those affecting income below $250,00 for a household and $200,00 for an individual. Here's the strange part. Both sides were framing this in terms of distinguishing among persons, as in "we want a tax cut for the middle class but they want a tax cut for the rich."

But that is simply not true. We are talking about marginal tax rates here. That is, it is not the case that a household making more than $250,000 would pay the old, pre-tax cut rate on all their income, only on income above the $250,000 cap. On all their income up to that limit they would pay the same rate as everyone else. When we say that the top federal income tax rate is 37 percent, we don't mean that the taxpayers who are in that bracket pay 37 percent in taxes on all their income, only on the income that the earn above the cut-off. The effective tax rates are quite different.

Then, of course, there is the matter of the relentless focus on federal income taxes. Leaving aside state and local taxes (a significant omission given the importance of property taxes, state sales taxes, licensing fees, and so on). Focusing only on federal taxes, here are the effective rates as of 2005, according to the Congressional Budget Office. For each of several categories of households, I include the effective rates for all federal taxes, individual income taxes, payroll taxes, and corporate taxes. (I am not including federal excise taxes, which are not significant.) Note that these categories overlap, as the top 1 percent is included in the top 5% percent and so on.

- top 1%: all taxes, 31.2%; income tax, 19.4%; payroll taxes, 1.7%; corporate tax, 9.9%
- top 5%: all taxes, 28.9%; income tax, 17.6%; payroll taxes, 3.5%; corporate tax, 7.4%
- top 10%: all taxes, 27.4%; income tax, 16.0%; payroll taxes, 4.8%; corporate tax, 6.1%
- top 20%: all taxes, 25.5%; income tax, 14.1%; payroll taxes, 6.0%; corporate tax, 4.9%
- everyone: all taxes, 20.5%; income tax, 9.0%; payroll tax, 7.6%; corporate tax, 3.1%
That's just the effective federal tax rates. A different question is what share of federal tax revenues, in each categories, come from each of these segments of the population? Again, these are 2005 data from the CBO:
- top 1%: all taxes, 27.6%; income tax, 38.8%; payroll taxes, 4.0%; corporate tax, 58.6%
- top 5%: all taxes, 43.8%; income tax, 60.7%; payroll tax, 14.4%; corporate tax, 74.9%
- top 10%: all taxes, 54.7%; income tax, 72.7%; payroll tax, 25.8%, corporate tax, 81.6%
- top 20%: all taxes, 68.7%; income tax, 86.3%; payroll tax, 43.6%; corporate tax, 87.8%
(Source: Historical Effective Federal Tax Rates, 1979 to 2005 (Congressional Budget Office, December 2007), here.

What about fairness? Don't the highest earners pay more than their share in taxes? The answer is, "yes, by a little bit," but not nearly as much as most people tend to think. Here is a look at the distribution of wealth, divided into all wealth, non-home wealth (known as "financial wealth"), and income. These data come from a study of 2007 Survey of Consumer Finance conducted by the Federal Reserve:

- top 1%: all wealth, 34.6%; non-home wealth, 42.7%; income, 21.3%
- top 5%: all wealth: 61.9%; non-home wealth, 71.4%; income, 36.9%
- top 10%: all wealth, 73.1%; non-home wealth, 81.5%; income, 46.8%
- top 20%: all wealth, 85.1%; non-home wealth, 91.6%; income, 61.4%
(Source: Edward N. Wolff, "Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze--an Update to 2007," Levy Economics Institute of Bard College working paper, March 2010.)

So, for example, in 2006 (located neatly between the two years of the data presented above), the top quintile of households earned 55.7 percent of pretax income and paid 69.3 percent of federal taxes, while the top 1 percent of households earned 18.8 percent of income and paid 28.3 percent of taxes. But note that these last numbers are distorted by the fact they compare income to all taxes, not just taxes on income -- If you look at the overall distribution of only federal taxes, the system is slightly progressive, and if you factor in the regressive effects of state and local property and consumption taxes, the entire system is even less progressive than that.

III. What Did the Reagan Tax Cuts Actually Do?

Historical discussions often lead into an impossible maze of information. For starters, there is the correlation-causation problem (if a tax cut is followed by growth, does that show that the tax cut caused the growth?) Nonetheless, we can at least look at some of the claims being made and try to focus more precisely on the areas of ambiguity. There are four major periods of tax cutting in modern history: the 1920s, the Kennedy administration, the Reagan administration, and the George W. Bush administration. I will focus primarily on the Reagan administration, with a few comments about the very large tax increases that were signed into law by Franklin Roosevelt.

We frequently forget that in addition to several tax cuts focusing on income taxes, Reagan also signed off on about a dozen tax increases, primarily on payroll and excise taxes. Measured in dollar value, the tax increases were about half as large as the tax cuts. In one way, this complicates the picture: What if there had been no tax increases? (Or, conversely, what if there had been no tax cuts?) If our question is "what is the effect of tax cuts on economic growth," this makes things complicated. On the other hand, if our focus is on the effects of tax rates on federal tax revenues -- the Laffer Curve claim -- we have a genuine experiment: by tracking the tax revenues that flowed in from the increased taxes and the decreased taxes, operating under the same economic conditions, we have an actual empirical test.

Another question is how we separate the effects of tax cuts or increases from changes in the overall economy. Again, the fact that these cuts and increases occurred simultaneously helps solve that problem. It is also the case, however, that economists measure the effects of tax rates on revenues in terms of a percentage of GDP rather than in gross dollar amounts. During periods of growth, this begs a very large question: what if economic growth would not have occurred but for the tax cuts in question? On the other hand, Reagan approved both tax cuts and tax increased during a recession. I'll come back to both of these points in a minute.

A. Tax Cuts and Tax Revenue: the Reagan Case

The main Reagan tax cut was the Economic Recovery Tax Act of 1981. That law had a number of elements that were phased in over time, reaching full implementation in 1983. By a nice coincidence, 1983 was also the year in which the most important tax increases took effect (the Tax Equity and Fiscal Responsibility of 1982, raising payroll taxes and certain excise taxes) took effect. Those and other Reagan tax increase were seriously regressive: In 1980, according to Congressional Budget Office estimates, middle-income families with children paid 8.2 percent of their income in income taxes, and 9.5 percent in payroll taxes. By 1988 the income tax share was down to 6.6 percent -- but the payroll tax share was up to 11.8 percent, and the combined burden was up, not down.

To test the effects of the two laws, I looked at the average for the four years following complete implementation (1983-1986), and compared that to the average for the preceding four years (1979-1982), using data compiled by the Tax Policy Center. The results:

- income tax revenues: 1979-82, 9.075% of GDP; 1983-86, 8.05% of GDP (down 11.29%)
- payroll tax revenues: 1979-82, 5.925% of GDP; 1983-86, 6.275% of GDP (up 5.5%)
- corporate tax revenues: 1979-82, 2.125% of GDP; 1983-86, 1.375% of GDP (down 35%)
But actually, the corporate tax cuts took effect in 1982. If we shift the years to that 1982 is included in the post-tax-cut category, the results are even more stark: the average corporate tax revenues from 1979-81 were 2.33% of GDP; from 1982-86 that average falls to 1.4%.

And just for comparison, for the four years from 2006-2009, the averages are:

- Income tax revenue: 7.65% of GDP
- Payroll tax revenue: 6.275% of GDP
- Corporate tax revenue: 2.125% of GDP

To repeat the point, during the very same years, in the very same economy, tax cuts resulted in a decrease in tax revenues measured as a portion of GDP while tax increases resulted in an increase in tax revenues measured in exactly the same way. Which, of course, leaves the question of the relationship between tax cuts and overall economic growth.

B. Tax Cuts and Growth

Here, we can range a bit more widely, recognizing that the larger the historical sweep of the discussion the more we are certainly omitting critical variables. Nonetheless, this exercise may be useful as an antidote to the kind of monocausal, ahistorical claims that are sometimes made on behalf of cutting taxes, such as this statement from the Heritage Foundation:

There is a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase...Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues...President Hoover dramatically increased tax rates in the 1930s and President Roosevelt compounded the damage by pushing marginal tax rates to more than 90 percent.

The preceding discussion was premised on the idea that we should look at tax revenues as a share of GDP. What if, instead, we look at the average annual change in tax collections? Here I do not have data breaking everything down by specifics, but on the other hand we have some long-term historical data which is potentially informative:

- FDR 121.3%
- Truman, 3.7%
- Eisenhower, 2.4%
- Kennedy, 4.8%
- Johnson, 6.9%
- Nixon, 0.3%
- Ford, 6.4%
- Carter, 3.0%
- Reagan, 2.4%

(Source: U.S. Office of Management and Budget, Historical Table 2.1, Budget for FY 1997.) That figure for FDR is not a misprint -- over 13 years, the total increase in tax revenues was 1,865%. FDR raised the top rate from 25 percent to 91 percent (that rate had been lowered in the 1920s from 75 percent).

What about general rates of economic growth? Here are the figures for increase in real GDP during the key years of FDR's administration, according to the Bureau of Economic Analysis:

- 1934,+10.9%;
- 1935,+8.9%;
- 1936, +13.0%;
- 1937, +5.1%;
- 1938, -3.4%;
- 1939,+8.1%.

What makes that 1938 figure so interesting is that in 1937, under pressure from conservatives in Congress, Roosevelt cut back on stimulus spending programs. Looking across a range of administrations, we get the following figures for overall economic growth: Kennedy-Johnson (49 percent over eight years), followed by Clinton (34 percent), followed by Reagan (32 percent), Nixon-Ford (24 percent) and Eisenhower (21 percent).

IV. Conclusions(?)

Actually, there are no clear affirmative conclusions to be drawn here except that we have overwhelming reasons to reject the claims being made by supply-side tax cut enthusiasts. The data certainly do not show that tax cuts never stimulate economic growth, nor even that they never stimulate economic growth enough to pay for themselves -- the data on the Kennedy tax cuts suggest that this is exactly what happened. But those were primarily demand-side tax cuts, similar to the tax cuts that were the largest element in Obama's stimulus package. The supply-sided, Laffer-curved theory of tax cuts as stimulus started out as voodoo economics 30 years ago. Today, Paul Krugman calls them "zombie" theories.
Which brings us to the question that has been plaguing Hollywood and cable television lately: Just what does it take to kill a zombie?

 

Comments

[Twayn]

01:41 PM on 02/01/2011

I'm not sure where Republicans got the idea that the Laffer Curve shows that tax cuts always increase revenue. It's simply not true and never was, even though I have heard countless conservatives claim it to be. The Laffer Curve simply says that at any given time, tax rates are probably not optimized to generate maximum tax revenue. In other words, taxes are usually either too high or too low. Yes, that's right, taxes can actually be too low! I'm pretty sure that's where we are now, after 30 years of cutting taxes, mostly for the wealthy, and 8 years of Bush spending money like a drunken sailor on off-the-books wars.

[itolduso]

01:34 PM on 02/01/2011

The only way to kill a zombie is to cut off it's head

[Kai-HK]

08:34 PM on 02/06/2011

I think you can also light them on fire.

[sposton]

01:32 PM on 02/01/2011

Useful subterfuges have their zombie-like existence. You can't kill them because they are very useful in brainwashing us into whatever oligarchy needs or wants. If we wish for such things to disappear the way to do it is to replace kleptocracy with democracy. If we don't, I can guarantee we will be hearing such nonsense ten years from now, unless the house of thieving cards collapses before that.

[olephart]

12:50 PM on 02/01/2011

The recent tax cut compromise is a fiscal train wreck. The Bush tax cuts, all of them, did little to stimulate the economy when enacted; did not prevent or lessen the severity of the recession and were in effect during the course of the stimulus. After these cuts were enacted and 35 months into Bush's first term the job creation rate was 1,000 per month. The stimulus was deemed unsuccessful by Republicans though it produced more jobs in its two years than Bush's tax cuts. It is obvious by the criteria used by Republicans to judge economic performance that the Bush tax cuts are a failure.

The Obama tax cuts are targeted to middle and upper incomes while lower incomes are short changed. They are mini Reaganomics. Working couples earning $200,000 per year could see $4,000 in tax savings. Those earning $35,000 per year would see only $700 which is less than the expired making work pay tax cut ($800).

These two tax plans do have one thing in common. All of the monies rebated must be borrowed. This is simply Republican borrow and spend on steroids. The Republicans have served their masters well sending borrowed money to those who don't need it. Obama will borrow whatever it takes to enhance his reelection hopes. That just leaves 98% of us to clean up after the party and pay the bills.

[econ1]

12:34 PM on 02/01/2011

One thing for sure, with Federal income tax, excise taxes, State income taxes, property taxes, payroll taxes (SS savings?), sales taxes, corporate taxes, auto taxes, gas taxes.....we seem to have enough taxes.

[blueken]

11:26 AM on 02/01/2011

That's all well and good, but I think the thing we are missing is, the money is already spent. The time to talk about tax breaks is when there is a surplus. Our government has spent more money than it has taken in for a long time. The money is gone. Now in order for the government to meet it's obligations for money already spent, they must increase revenue. Pure and simple. As far as how small increases in the tax rate will affect the economy. Let's look at how tax breaks for the rich affect the economy. The wealthy end up with so much money that they run out of good invetments. Wall Street doesn't like to leave money on the table, so they invent investments. Investments of questionable quality. As soon as Wall Street runs out of the bigger fool, those questionable investments become worthless. This cycle is in fact not good for the economy. Now look at incremental tax increases on the working people. What will the average working person do with an extra $20? Obama gave the average working person an extra $20 on average in their paycheck. Most Americans are not even aware of it. I would say, little or no affect.

[noaxe397]

08:31 AM on 02/01/2011

How many times does a theory have to be shown it doesn't work before you stop calling it a theory?

[bllnsinchnge]

08:14 AM on 02/01/2011

Great article professor, thanks. I would sure like to hear more about the spending ratio of federal government in comparison to GDP. Your article also failed to mention another cost to employees and employers, the amount of regulations. The regulation compliance costs add not only expense to existing employees, but also entire compliance positions.
When government is spending money, it is spending a citizens money on their behalf.

This is like the deli manager telling the grocery customer how they should spend their paycheck, what forms and rules the customer should abide by, and how much should be spent at the deli. The government works to serve us, as does the deli manager.

[Kai-HK]

06:47 AM on 02/01/2011

Mr Scweber:

I am not so worried about the rich, when the top 1% pay more in federal taxes than 95% of the population, with 47% of the population becoming net takers and not paying their fair share, it becomes obvious that out tax system is not broad enough.

The current system allows people making minimum wage, taking advantage of all tax benefits and federal payments, to end up with more discretionary income than a family making 60K a year. This kind of perverse incentive allows a gaming of the system to the detriment of an ever-shrinking tax base. We are rewarding failure and penalizing success.

In order for America to get back on track, and allow for everyone to have some skin in the game and have a vested interest in lower taxes, we need to broaden the tax base. That means that people with lower incomes need to start paying their fair share.

Kai

[SoylentGreenIsPeople]

07:12 AM on 02/01/2011

Why no links to economic data ? No Proof ?

[Kai-HK]

09:39 AM on 02/01/2011

Sorry SoylentGreenIsPeople (love the name always wonder why they wont do a remake of this classic movie) this was widely reported in almost of all the MSM. Was in a hurry and did not spend much time documenting this morning and they never give you much room to get it all down anyway so I usually leave off sources.

Good starting place is the first link, read a few of the comments. Quite funny by people that actually prepare taxes and see the rent seeking being done by the nearly 50% that gets a free lunch:

http://theblogprof.blogspot.com/search/label/taxes

http://www.usatoday.com/money/perfi/taxes/2010-04-07-income-taxes_N.htm

http://www.rothcpa.com/archives/005201.php

http://www.taxfoundation.org/news/show/24953.html

Come back to me if you need more.

Kai

[Kai-HK]

08:33 PM on 02/06/2011

It's been a while. Do you still need more proof? Or are you a believer now?

[noaxe397]

08:23 AM on 02/01/2011

So what is the answer regarding those who pay no taxes?
 
There are only two:
 
Pay them more money so they return to the tax rolls or raise their taxes.   Which do you suggest?
 
And, doesn't the family making 60K get the same tax deductions, exemptions, credits, etc as the minimum wage family?
 
How is it a failure to NOT pay taxes?  Isn't that what Exxon Mobil, BofA and GE aspire to?  I think the government actually owes money to GE
.
Why is it acceptable, even admired and encouraged, for the well off and large corporations to not pay taxes but when the low wage earner does the same thing he is a deadbeat, leeching failure?

[Kai-HK]

10:21 AM on 02/01/2011

I would go with a third option, reduce taxes to a low flat tax that everyone pays. I live in Hong Kong now where the rate is 15%, with a very very low threshold poverty level, meaning basically everyone pays. The rate is so low that it is not onerous to either the poor or the rich. We have a small highly-efficient government, great infrastructure, great medical, our unemployment is in the 3% range, meaning basically we have all but full employment. People here have opportunity to make money and move up.

I am originally from North Dakota and, later, Arizona. I went back to Phoenix in May and was struck at how poor it looks compared to Hong Kong or even Shanghai. We need to lower taxes and expand the tax base and invest in infrastructure, the buildings not the bloated union labor.

Good point on some corporations getting preferential treatment. If there is one thing I hate more than crony socialism, it is crony corporatism. That being said, I have looked into a lot of these claims of corporations not paying taxes and I find many of them amplified above merit. Not saying it doesn't happen and the point in general is fair. I recommend one low flat tax, say 15%, for corporations also. We have that here in Hong Kong and it works like a charm. Did I mention the 3%+ unemployment rate?

Kai

Kai

[mashtoe]

03:27 AM on 02/01/2011

If you want to tackle the tax cut beast you have start pushing for massive middle class tax cuts. Cut working people's taxes in half or more. Why? If we cut taxes that much then we would have to really cut services and it would finally start a debate on who should be paying taxes.

Right now it's too easy to just keep borrowing. We need to push hard for massive tax cuts. Then push for real reform.

[noaxe397]

08:26 AM on 02/01/2011

I appreciate your POV, but lets face it:  You would just encourage even MORE borrowing as the tax receipts continued to fall.
 
We no longer as a nation believe even war is a sufficient reason to pay for something.

[SoylentGreenIsPeople]

11:30 PM on 01/31/2011

First, consider the GOP cover-up lie: “We are tax cutters, because we want you to keep more of your money.” A more verifiable, restatement of the impact of their actions would be: “Our designated task is to legislate tax shifters to shift the tax burden onto middle-class voters so as to shift more of the wealth of this nation upward to our core campaign contributors.
http://michael-hudson.com/2010/11/schemes-of-the-rich-and-greedy/

[OMEGA MAN]

11:13 PM on 01/31/2011

“We Know that the tax cuts didn't pay for themselves or reduce the deficit.

Annualized Growth Rates

Clinton

1993 to 1996 Real GDP = 3.44%
1993 to 1996 Real GDP per capita = 2.22%

1997 to 2000 Real GDP = 4.44%
1997 to 2000 Real GDP per capita = 3.26%

1993 to 2000 Real GDP = 4.01%
1993 to 2000 Real GDP per capita = 2.81%

Bush

2001 to 2004 Real GDP = 2.62%
2001 to 2004 Real GDP per capita = 1.68%

2005 to 2008 Real GDP = 1.75%
2005 to 2008 Real GDP per capita = 0.79%

2001 to 2008 Real GDP = 2.31%
2001 to 2008 Real GDP per capita = 1.36%”

[Kai-HK]

06:33 AM on 02/01/2011

So what you are saying is that during the Republican Congress from 1997-2000, GDP was 4.44% and during the Democrat Congress 2006-2008, the rate is 1.75%. Does that mean Republican Congress's are good for America? You learn something new every day ;)

[noaxe397]

08:28 AM on 02/01/2011

And what wealth destroying policies did the 2006-2008 Democratric Congress enact that escaped the Bush veto pen.
 
Be specific and conviincing.

[IgnoranceIsStrength]

07:44 AM on 02/01/2011

The economy before and after tax cuts ! The Bush tax cuts didn't stimulate the economy. They slowed the economy down.

[Kai-HK]

08:17 AM on 02/06/2011

Or maybe the tech bubble bust, 9-11, egregious government borrowing, Katrina, and housing bubble bust, and financial crisis had something to do with the low growth numbers that somehow provided a countervailing force to the economic growth created by the tax cuts. Why would a tax cut at any income level or in any industry, if government spending stays constant through borrowing, reduce economic growth? Explain how that would work?

[William1950]

10:55 PM on 01/31/2011

i am no economist... what is the difference between income tax, and payroll tax? is payroll tax just what the name suggests? income from wages ... and income includes all income from all sources?
i like the idea of a flat tax on all income with no deductions and no exemptions.. with the first twentyfive thousand being free... it sure would make it easier to understand.

[bllnsinchnge]

07:56 AM on 02/01/2011

Payroll taxes are paid 50% by the employer and 50% by employee. Income tax would be included in the employee percentage, but not necessarily equal as state and local variances would occur.
here is another thought on taxes www.fairtax.org

[ErnestineBass]

10:35 AM on 02/01/2011

The "Fair Tax"?

About as "Fair" as "The Patriot Act" was patriotic.

You people are lousy cryptologists.

[William1950]

11:24 PM on 02/01/2011

social security taxes are payroll taxes? ... I am trying to understand the lingo thanks for helping.

[CPAwADD]

09:09 PM on 01/31/2011

It's really hard to understand something if you get more money not understanding it.

[letprosecutionsbegin]

07:10 AM on 02/01/2011

Brilliant ..

Or if you get money just to make stuff up ..

The laugher curve ..

No one can say e con o mists don't have sense of humor

[CPAwADD]

08:40 AM on 02/01/2011

Can spell economist without con.

[BBackSoon]

08:21 PM on 01/31/2011

The only people I have ever heard of that do something along the lines of the Laffer Curve is when you have employees that get paid overtime. There is a point when you actually make less money per hour because the taxes jump. But I don't believe someone in the $200k range has these issues.

[ErnestineBass]

10:45 AM on 02/01/2011

Indeed. In the late eighties I found that once I hit 10 hours of overtime, each hour beyond that netted only half of what my regular time hourly rate did. Thanks, Ronnie.

[fugmo]

03:37 PM on 02/10/2011

That is true for your take-home portion but the OT also allows more in SS when you receive that and also a higher tax return since the OT is taxed at the hourly rate (assumed to be what you make the entire year) while your income taxex are determined by annual earnings.