← Money, Drawn · Lesson 2 of 4
A bracket is a cut bar
Here is a made-up tax system, simpler than any real one: the first $10,000 you earn is taxed at 10%, and every dollar above $10,000 is taxed at 20%.
Draw your income as a bar and cut it at $10,000. The left piece pays 10% and the right piece pays 20%. On $15,000 that is $1,000 on the first piece and $1,000 on the second: $2,000 in all.
A common worry is that a raise into a higher bracket makes all your pay taxed at the higher rate. The bar shows why it cannot: the cut is fixed, and only the dollars to the right of it pay the higher rate.
In the made-up system, a raise takes you over the $10,000 line. What happens to the tax on your first $10,000?
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