Tag Archives: Bush tax cuts

France’s 75% Tax on Millionaires is Not What You Think

Almost two years ago now, there was a big hullabaloo because France proposed a 75% tax on millionaires. Some folks were really upset that millionaires were going to have to pay 75% of what they earned in a year for taxes. WRONG. This is not true. In no country (that I’ve ever seen), do taxes work this way. One of the words you often hear — progressive. Another one — marginal. Confused?

I’ve been thinking about this over the last few days. Since it was announced that the President of France was getting approval for the 75% tax, I’ve been listening to what some folks have been saying about this tax. It reminds me of what happened last year (around this time) when there was talk of extending the Bush tax cuts in the US. People were confusing or not really understanding just how the tax system works.

Essentially, taxes are the same for everyone. How?

There was an article in the New York Times a couple of years ago where there was someone in the US who was worried about making a few extra thousand bucks because she didn’t want to be taxed at the higher rate. What? That’s right. She thought that because she made (fictitious numbers) $100,000 instead of $98,000, she was going to have to pay more taxes on all of her $100,000. If you know anything about taxes, you know that this is not true.

When you pay taxes, you pay the same as everyone else. That is, if someone earns $35,000/year and you earn $50,000/year, you both pay the same amount of taxes (up to) $35,000/year. However, you will also have to pay taxes on that $15,000 difference. Depending on the country’s laws, that might be the same rate. Another word for this is tax brackets.

Remember earlier when I mentioned the words marginal and progressive? This system of paying similar amounts of money across people is called marginal or progressive taxes. It’s important that it’s conducted in this manner, otherwise people would be incentivized to do what that lady in the NYT article was talking about — not earn extra money when you’re near a new bracket for fear of having to pay a different rate on all of your money. Of course, we know that this isn’t true.

Something I don’t understand is how many people simply don’t understand this. There are some things in life that are important and worth knowing and I’d think that knowing how/why you pay your taxes would be one of them. Maybe we need to do a better job of educating folks in school about this idea of marginal/progressive taxes. Maybe we need to change the name, I don’t know. Until then, I’ll keep writing posts like this to remind you just how tax systems work.

By the way — I should note that I’m not arguing for/against the 75% tax that Francois Hollande has just had approved, I’m simply trying to explain what it is, so that when people do debate the merits, they’ll actually be talking about the same thing.

Taxes are the Same for Everyone: Marginal Rates vs. Millionaires and Billionaires

I was watching some of the coverage of the ongoing fiscal cliff mess and I heard one of the people being interviewed talking about how the “Bush tax cuts” are going to be extended for 98% of Americans. This. Is. So. Wrong. I’d like to assume that the people on TV informing the nation know that they’re wrong or that they’re misleading, but I don’t know — maybe they don’t know. Regardless, they’re unintentionally perpetuating myths that have long since been debunked.

To flesh this out: it’s not that once you make a certain amount of income, your rate is completely different for all the money you make, NO! The USA has marginal tax rates, so the first $250,000 you make will get taxed at one rate and any money you make above that gets taxed at a different rate. So, when pundits or talking heads or anyone talking about this fiscal cliff mess tells you that the Bush tax cuts are being extended for 98% of Americans (or any number less than 100%) — they’re wrong.

There Is No Fiscal Cliff: A Lesson in Metaphor

If you live in Washington, DC, you most certainly hear and read about the “fiscal cliff” on a daily basis — especially as the “impending doom” inches closer. If you don’t live in DC, you’ve probably still heard/read about the fiscal cliff because there are national implications. I wonder — did you stop to think about the “fiscal cliff?” That is, does the metaphor accurately represent what it is that we’re talking about?

From Matt Yglesias:

A salient fact about non-metaphorical cliffs is that falling over them is generally irreversible. If the cliff is high enough that falling off of it would kill you, then if you fall off you’re going to die and that’s the end of it. The “fiscal cliff” by contrast isn’t like that at all.

And from Steve Kornacki:

That’s not a good way to understand what we’re facing. The reality is that the “cliff” is really more of a slope. A gradual slope. It works like this:

If nothing happens between now and the end of the year, then on January 1, the Bush tax cuts will expire, the alternative minimum tax will reach further down the income ladder, and payroll tax rates will revert to 6.2 percent. (They’re 4.2 percent now — that was part of the big Obama tax cut that no one ever seemed to notice or give him credit for.)

But — and this is the critical point — this won’t all happen at once.

It’s not like John and Jane Taxpayer will wake up on January 1 and be socked with a bill for $3,000. Only the payroll hike would go into effect right away.

It would be months before most taxpayers were actually hit with higher income tax rates or the AMT [Alternative Minimum Tax].

Ditto for the big, scary spending cuts you’re hearing about, which will be phased in over the year, and even into future years.

And why is this important?

Because it means there’s time after January 1 for Congress and the White House to reach a deal — lots of time.

I’ve written about the importance of words, but when it comes to instances like this, the words we use are even more important. The fact that so many of us are constantly using this metaphor to discuss the impending changes to America‘s fiscal policy makes the metaphor that much more entrenched. And by extension, that also makes those people who only hear about these changes in passing that much more frightened (by the metaphor).

So, when you hear dramatic metaphors, especially from politicians, be sure to look into the details to decide whether someone’s using hyperbole to scare the public.

Oh — and in case you’re interested, from the Center on Budget and Policy Priorities:

The greater danger is that misguided fears about the economy going over a “fiscal cliff” into another Great Recession will lead policymakers to believe they have to take some action, no matter how ill-conceived and damaging to long-term deficit reduction, before the end of the year, rather than craft a balanced plan that supports the economic recovery in the short term and promotes fiscal stabilization in the intermediate and longer run.