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Author Topic: Ideas for more efficient tax breaks
couldge
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I've been reading OSC's columns for years, but I've just started to participate in the forum discussions. I thought I'd give a go at starting a new discussion topic.

With all the discussion, mostly among the presidential candidates, of a gas tax holiday for this summer I've been thinking that there must be better tax break ideas out there.

Here's one that I've thought of. Basically, I propose that the federal government only tax individuals for their first 40 hours of work. The 40 taxable hours of work would consist of the highest paying hours. In other words, either the higher paying job, overtime hours, etc would be allocated under the taxable hours.

This type of tax policy would probably increase productivity, but more importantly it would provide individuals an opportunity to provide more for themselves and their families. A few years ago, for example, my mom decided to get a second job to pay for dental expenses. (She doesn't have dental coverage.) When it came time to pay taxes she found out that the second job wasn't actually helping her that much with the extra expenses as she was paying more taxes. She decided to quit the job. I am willing to bet that there are a lot of people who would like to work more, but realize that it's not worth it because of the current tax policies.

I'm interested in everybody's thoughts on this policy, if there are any flaws in my reasoning, or if anyone has seen this type of policy suggested elsewhere. Also, I'd like to hear of any other related tax reform ideas.

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Lyrhawn
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Kind of hard to comment without hard numbers. What would it cost in lost revenue? What are theoretical gains due to increased productivity?

Off the top of my head, I guess it doesn't sound like a horrible idea. But I have to wonder, how would this effect salaried employees? Hourly employees obviously benefit in easily identifiable ways, since every overtime hour the work means one regular hour they get tax free. It might not seem like much, but putting all the tax dollars taken out back into a regular hour would probably be a lot like having an overtime hour, so to them I doubt they'd care.

But what about salaried employees who work 60 hours a week? Do they get a percentage of their salary back based on their hours? Do they have to start clocking in and out like hourly employees do?

It seems like an idea targeted towards what I think most politicians would call "working class" Americans. Personally I like it, as it might mean more money for me personally for the few weeks that I work more than 40 hours, but I have to wonder the logistics of such a plan for salaried employees, and about the potential lost revenue from such a plan, though I acknowledge that it could mean potential productivity gains.

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ketchupqueen
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KPC would almost certainly have something to say about this topic (if nothing else, perhaps a way your mom could work extra hours but not be in a higher bracket...)

I'll let him know there's a tax topic on Hatrack. After he's finished his studying for the EA exam, that is.

Welcome to Hatrack. [Smile]

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couldge
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I was wrong when I wrote about increased productivity. I'm not sure this change in policy would really increase productivity (except for maybe higher morale of the average worker - though I doubt it). It I believe it would increase output (GDP) on the macro level although this is a little uncertain as it may push other employees out of the labor market. So potential benefits at this point would mostly come be the added benefits to individual employees.

I hadn't thought about salaried employees. Giving a similar tax break to salaried employees would be extremely complex but still possible. The goal, however, of this policy would be to increase output and to benefit individual employees. Salaried employees by definition work as much as their employer requires, so this tax break wouldn't encourage them to work any more for this employer. I suppose, this policy would work best if it did not apply to salaried positions. But if the salaried individual got a second job that wasn't salaried then those hours would definitely qualify as tax free. This would require that he/she could document that the salaried position required at least 40 hours a week.

You would expect a loss of tax revenues for most any tax break. I would probably require employers to still pay their half of the payroll taxes. Estimating the loss of revenue would be difficult.

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Lyrhawn
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With exploding deficits and national debt, the loss of revenue would maybe be the single biggest determining factor, though I suspect it'd actually be pretty small. The sum total hours of hourly employees that work overtime, and the taxes on the non-OT hours that make of the difference between the OT hours and the regular 40 hours and the taxes levied on those hours can't be that much. In terms of multi billion dollar tax breaks that get thrown around, I think this would be relatively minor. Especially with how it'd be packaged. They'd talk about how this rewards Americans working extra hours, trying to make ends meet, and they'd trot out moms and dads working three jobs and 80 hours a week to make ends meet. It'd be difficult to vote against such a measure, becuase it'd be used to lynch whoever voted agains it in the next campaign.

Still, I'd want to know the cost, which I realize that we here probably would have trouble figuring out, but professionals wouldn't. The fact that it's specifically for hourly employees underscores the blue collar feel to it.

I wonder how specifically this fits into your theme of "more efficient tax breaks." How does this make taxes more efficient? Or rather, in what was is this a more efficient tax break?

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fugu13
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And, of course, the biggest problem would be it would be impossible to implement without monumental acts of bookkeeping and inspection.

The best tax break would be to start eliminating tax breaks.

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TomDavidson
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I don't understand why we'd want to encourage people to work more hours for their employer, anyway. Americans already spend too many hours at work and too few hours actually working.
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Glenn Arnold
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My thought is that each bracket of your income would be taxed as a flat tax at a different rate.

For example, (numbers for example only) the first $10k would be tax free, the next $10k would be taxed at 5%, then next $10k would be taxed at 10%. the next $10k would be taxed at 15%, and so forth, with some tax cap before you reach 100%.

That way there's no way someone could complain that their raise actually caused them to lose money by pushing them into a higher tax bracket, and you'd get rid of the same tax loopholes that would be eliminated by the so-called "flat tax," and it would still be a progressive tax.

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King of Men
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quote:
Originally posted by Glenn Arnold:
[QB] My thought is that each bracket of your income would be taxed as a flat tax at a different rate.

Well, yes. That is in fact what happens already.
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Glenn Arnold
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Not really. The tax rate is detemined by the total amount of your taxable income. The first 10k that I earn is taxed at the same rate as the last 10k that I earn in any given year.
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Jhai
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But that's just "mathematical semantics," Glenn. If you change the percentage taxed as income levels increase, then it's the exact same effect.

For example, if you have $100,000 taxed at 16%, then the government is getting $16,000. If you have $100,000 where the first, say $20,000 is tax-free, then the next $40,000 is taxed at 15% ($6,000), and the next $40,000 is taxed at 25% ($10,000), then you get the same total.

In the end, all that matters is the total taxed at each income level, neh? Set the percentages as you like, and the only difference you might get between a flat percentage depending on income, and different tax rates as you earn more is a framing issue. And that is the least of the problems you should be worrying about in taxes - real incentive problems is a larger issue.

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The Reader
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quote:
Salaried employees by definition work as much as their employer requires, so this tax break wouldn't encourage them to work any more for this employer. I suppose, this policy would work best if it did not apply to salaried positions. But if the salaried individual got a second job that wasn't salaried then those hours would definitely qualify as tax free. This would require that he/she could document that the salaried position required at least 40 hours a week.
This is acts as a penalty on salaried employees. They remain taxed at what is essentially a higher rate because their whole income is considered in the tax, while hourly employees are only taxed for extra work.

Then they take a second job that is untaxed, and work another 40 hours. When does he or she sleep? Why not just quit the salaried job take the hourly job? Or, if the salaried job pays enough, why bother with the second job? This doesn't increase productivity.

Finally they have to document those hours. Do they do that weekly, monthly, or annually? How much work is involved in that?

As for hourly employees, they have no incentive to work overtime. They have received the maximum possible benefit of their 40 hours, and the benefit decreases with every extra hour. This doesn't increase productivity either.

I like Glenn Arnold's idea, but I can't help but think that the cap would have to be at a low income level in order to keep overall rates for high income earners at a fair level.

Edit: Okay, I didn't understand Glenn's approach. I thought it was about yearly income.

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Glenn Arnold
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It is and it isn't. The arguments for a flat tax can be made for my proposal. Certain tax loopholes would be eliminated, and the process of paying taxes would be greatly simplified.

As it is, wealthy people go to great lengths to use those loopholes to lower their taxable income amounts, because it has a great impact on their entire tax bill. Using my proposal, lowering your taxable income would only have an impact on the greatest 10k interval. The rest would be unchanged. But since instituting a flat tax is supposed to eliminate those loopholes, it would also eliminate the difference between income and "taxable income."

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fugu13
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I'd like more details on your proposal, because I can't figure out exactly what you mean. Say someone has $300,000 in income, and $247,000 in taxable income. How, under your plan, would their tax rates be altered?
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Glenn Arnold
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All other things being equal, my proposal shouldn't alter their taxes at all.

The proponents of "flat tax" want a flat rate, regardless on income level. That would penalize poor people because if the rate is (say) 30%, then a person who earns 10k would pay 30% on that 10k, which they really couldn't afford. I think that idea is crazy.

But the other part of flat tax is the elimination of flat tax is the elimination of tax breaks. A flat tax taxes you at a given rate regardless what you do with your money after you earn it.

My proposal reduces the incentive to claim that a $10,000 trip to Europe was actually a business expense, because it would only reduce their tax bill on the taxed portion of the 10,000 they are trying to reduce from their overall income, rather than reducing the overall taxes on their overall income.

Does that make more sense?

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TomDavidson
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Glenn, I don't think you understand how tax brackets work now. There is no magical point -- barring certain things, like cutoffs for EIC eligibility and whatnot -- where making a dollar more and pushing yourself into a new tax bracket will suddenly raise your taxes by more than what you earned.

In fact, the way we're taxed now is pretty much the way you're proposing that we be taxed.

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King of Men
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Actually, I think there are a lot of means-tested welfare programs that in effect make marginal tax rates for poor people well in excess of 100%. For example, if you get a job and earn enough not to be eligible for food stamps anymore. But above the welfare level, indeed, you cannot make yourself worse off by earning more.

I note, this actually did happen in Sweden once. Astrid Lindgren, the author, found herself in local and federal tax brackets such that she was paying 102% taxes; each book sold was actually a loss for her! Apparently nobody had thought about putting together the two forms of taxes and checking the effects. She wrote a short story about it, in which the viewpoint character observes that "So many percents don't exist!" The tax law was changed shortly thereafter.

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fugu13
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quote:
My proposal reduces the incentive to claim that a $10,000 trip to Europe was actually a business expense, because it would only reduce their tax bill on the taxed portion of the 10,000 they are trying to reduce from their overall income, rather than reducing the overall taxes on their overall income.
No, it doesn't. Please provide numbers. The tax brackets right now are marginal brackets, and I still can't comprehend how what you propose is different at all (in terms of basic structure).

And KoM is right, there are some really stupid tradeoffs at the low end. Its one reason I'm a big proponent of an EITC/negative income tax program, to provide effective subsidies to the poor but reduce perverse incentives.

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Glenn Arnold
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quote:
There is no magical point -- barring certain things, like cutoffs for EIC eligibility and whatnot -- where making a dollar more and pushing yourself into a new tax bracket will suddenly raise your taxes by more than what you earned.
Funny, I made this argument many years ago. I had an electronics professor that insisted on spending half the class making political statements, and taxes were a big part of his shtick. He insisted that when he got a raise that he actually earned less money, and I told him that he didn't understand how tax brackets work. That's part of the basis of where I started formulating this idea.

Jhai said it's mathematical semantics, and I admitted: it's the same, and it isn't. As the idea progressed in my mind, at first is was an explanation of the current tax system, and later it became a way to present the "flat tax" argument from a progressive tax standpoint. It would change the way tax forms are filled out, and it would could or should be accompanied by elimination of tax loopholes.

If all it did was eliminate some of the griping about taxes it would serve its purpose. Shame it's so transparent though. Wonder if it would be the same among the hoi polloi.

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BlueWizard
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Here is the problem, the government needs a certain amount of money. You can juggle the tax codes all you want, but in the end, the government is going to need 100% of the money they need.

What needs to happen is for all the graft and corruption, all the backdoor under-the-table hand outs to buddies and constituents, to be eliminated. I have not doubt they could cut 20% out of the current budget if they would just clamp down on the "good ol' boys" networking.

Personally, I've always been in favor of giving the General Accounting Office police power. Make the GAO to Congress what the IRS is to the people. When Congress members create backroom deals to build bridges to nowhere, and to buy equipment that the military doesn't want and can't use, the GAO would step in a implement a criminal investigation, and if necessary prosecute the offender.

I think if that were in place, the budget would drop pretty quickly. There would be no more bridges to nowhere, or $600 ash trays or hammers.

steve/bluewizard

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Glenn Arnold
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Bleuwizard,

Sounds like a great idea.

On a related note, I've often wondered why there is no penalty for violating the constitution. That is, when the president or congress does something unconstitutional, the worst that happens is that someone tells them that they weren't allowed to do it, but there's no penalty exacted for the damages already done.

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BlueWizard
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I think it is one thing to pass a law that is later ruled to violate the constitution, but another thing all together, to knowingly and willfully try to subvert the Constitution to your own advantage. One is a simple mistake, and the other, in my opinion, is the highest crime that the government can commit.

I would put the Patriot Act into that category, as well as domestic unwarranted spying on American citizens. The President can whine and cry all he wants about 'terrorism', but that is merely an exuse and not justification.

Keep in mind that Congress has not declared war, and as such, there is no justifiable need for such unconstitutional actions.

There will always be a good excuse to subvert freedom and liberty, but remember, once you give it up, it is extremely difficult to win back again.

Just a thought.

Steve/bluewizard

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Glenn Arnold
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quote:
One is a simple mistake, and the other, in my opinion, is the highest crime that the government can commit.
Which is why it's weird that there is no penalty for it. I had the McCarthy hearings in mind. Never mind that those people never got restitution for the interruption into their livelihoods, McCarthy et. al. got away Scott free.
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couldge
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Lyrhawn:

I guess my definition of efficiency would be that people make choices more like they would without the government intervention in the first place. All taxes affect the behavior of individuals. The progressive income tax unfortunately encourages people to work less than they would normally which is inefficient. I personally feel the gas tax holiday idea is extremely inefficient but any tax policy is going to have it's own inefficiencies just by the nature of taxes.

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couldge
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quote:
Originally posted by TomDavidson:
I don't understand why we'd want to encourage people to work more hours for their employer, anyway. Americans already spend too many hours at work and too few hours actually working.

For me it's not only about encouraging people to work more hours - although that will happen. It's more about allowing people the opportunity to earn more without all or significant amount of their earnings being taxed away. As far as getting Americans to do more work while they are on the job - I think that lies more within the stewardship of the businesses.
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King of Men
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quote:
Originally posted by BlueWizard:
Here is the problem, the government needs a certain amount of money. You can juggle the tax codes all you want, but in the end, the government is going to need 100% of the money they need.

Well, there's needs and needs. Do we really need farm subsidies in the billions?
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couldge
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quote:
Originally posted by fugu13:
And, of course, the biggest problem would be it would be impossible to implement without monumental acts of bookkeeping and inspection.

The best tax break would be to start eliminating tax breaks.

I think what my proposal would be easy enough. Just a couple more boxes in the W2 showing how many hours are taxable and how many are not - and then adjusting the boxes showing the taxable income. If the tax break comes from working more than one job then there could be an extra tax form to fill out just like for any other tax break where you would have to provide the appropriate documentation and the final tax break would be based on some formula.
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couldge
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quote:
Originally posted by The Reader:
quote:
Salaried employees by definition work as much as their employer requires, so this tax break wouldn't encourage them to work any more for this employer. I suppose, this policy would work best if it did not apply to salaried positions. But if the salaried individual got a second job that wasn't salaried then those hours would definitely qualify as tax free. This would require that he/she could document that the salaried position required at least 40 hours a week.
This is acts as a penalty on salaried employees. They remain taxed at what is essentially a higher rate because their whole income is considered in the tax, while hourly employees are only taxed for extra work.

Then they take a second job that is untaxed, and work another 40 hours. When does he or she sleep? Why not just quit the salaried job take the hourly job? Or, if the salaried job pays enough, why bother with the second job? This doesn't increase productivity.

Finally they have to document those hours. Do they do that weekly, monthly, or annually? How much work is involved in that?

As for hourly employees, they have no incentive to work overtime. They have received the maximum possible benefit of their 40 hours, and the benefit decreases with every extra hour. This doesn't increase productivity either.

.

I would argue it's not a penalty on the salaried employees as it is a benefit for the hourly employees. Your right though this would have the effect of employees demanding not to be salaried and my guess is that a lot businesses would oblige them.

Who said a second job had to be full time? I work full time and have thought seriously about getting a second part time job. I would be much more willing to do so if I knew that the money earned at that second job would be tax free (or perhaps taxed at a lower rate).

I don't see it as being difficult to document hours weekly, monthly, or annually. As it is now most employers document total hours worked on your payroll stub every two weeks and these hours include overtime hours. For a second job - you would just document that you already had a full time job where you got paid for 40 hours a week then you would get the second job tax free. (This would probably be part of the 1040 process.

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scholarette
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My husband and I are borderline for several government programs. To make sure we qualify, we cut back his hours by like 4 hours a month. It is $40 less in pay per month, but we get Chip and WIC- which save us about $200 a month. So not working those 4 hours saves us $160 a month.
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rivka
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quote:
Originally posted by BlueWizard:
Make the GAO to Congress what the IRS is to the people. When Congress members create backroom deals to build bridges to nowhere, and to buy equipment that the military doesn't want and can't use, the GAO would step in a implement a criminal investigation, and if necessary prosecute the offender.

I think if that were in place, the budget would drop pretty quickly. There would be no more bridges to nowhere, or $600 ash trays or hammers.

[cynic]
Sure there would be. But the cost would go up 5% to allow for the bribes to the right GAO officials.
[/cynic]

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TomDavidson
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quote:
It's more about allowing people the opportunity to earn more without all or significant amount of their earnings being taxed away.
I don't see that this is the case currently; the idea that people aren't working second jobs now only because they're afraid of paying extra tax is one that I find unlikely.
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fugu13
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Your proposal would not be easy at all. Filling out your tax forms? Oh look, I suddenly worked a lot of overtime this year. Sixty hours a week means a third of my salary is untaxed . . . good luck checking that. It would be a nightmare.

Heck, even for the people who wanted to be honest, the bookkeeping would be insane. (edit: who had anything other than a typical schedule, of which there are many).

(continuing the edit: and lets not get started on self-employed people, partially self-employed people, which 40 hours get taxed -- oh look, my part time second job pays far more than my full time job, et cetera)

Adding new complications to the tax code is not the way to make life better for people. Simplify the tax code. Remove all deductions. Reduce base rates instead. Provide a negative income tax (or similar proposal). Remove all but a few brackets.

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The Reader
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quote:
I would argue it's not a penalty on the salaried employees as it is a benefit for the hourly employees. Your right though this would have the effect of employees demanding not to be salaried and my guess is that a lot businesses would oblige them.
Salaried employees remain taxed normally, while hourly employees receive a break. More of an overall percentage of the salaried employees' money is taken. It is a benefit for the hourly employees, but it is also a penalty for salaried employees.

Would many businesses oblige their employees' wishes if it meant increasing costs, mainly through overtime pay and payroll taxes?

Besides, salaried and hourly positions are not determined arbitrarily. There is a law.

quote:
Who said a second job had to be full time? I work full time and have thought seriously about getting a second part time job. I would be much more willing to do so if I knew that the money earned at that second job would be tax free (or perhaps taxed at a lower rate).
I made a mistake. I thought that you said that the second job would be forty hours a week, but you said that the salaried position would require at least 40 hours a week. I apologize for that misunderstanding.

However, in order for the second job to have a significant impact on income, many hours would need to be worked. How long someone would want to work in a week is up to the individual. That's good, but as I said, if one job is taxed at the full rate, and the other isn't, why keep the salaried job at all, if everything is relative?

quote:
I don't see it as being difficult to document hours weekly, monthly, or annually. As it is now most employers document total hours worked on your payroll stub every two weeks and these hours include overtime hours. For a second job - you would just document that you already had a full time job where you got paid for 40 hours a week then you would get the second job tax free. (This would probably be part of the 1040 process.
Okay I understand that now, but I still don't see how adding to the burden of the 1040 process helps. This really creates a whole set of complications. What if you were audited and forced to prove the tax-free status of the second job? Would the second employer be audited and forced to prove that you are a tax-free employee?

There would have to be even more oversight from the government, specifically the IRS, thus increasing costs, and most importantly, the reach of government within your life as an employee.

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fugu13
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Oh, yeah, that's the other wonderful thing: it would suddenly be impossible for employers to calculate withholding without significantly more information (what other jobs you are working and how long you are working them). Besides more intrusion of privacy, that's more bookkeeping nightmares.
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King of Men
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Oh, well, that's easy to fix: Employers will withhold on the assumption that theirs is your only job. Then you get to be the accountant in April, and whatever you overpaid is returned at a munificent 0% interest! As tax breaks go, this one certainly does have the advantage of generating a lot of interest income for the government.
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