Tag Archives: Tax rate

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.

Would You Rather Pay Fees or Taxes?

A little over a week ago, Matt Yglesias wrote a post on Slate about how to balance the budget while slashing taxes. The solution: call everything a fee.

Well we could solve an awful lot of problems that way. For example, I’d love to see us impose a greenhouse gas emissions fee to internalize the social cost of carbon dioxide. On top of that, I think a small additional fee on the use of gasoline would be justified. And of course road congestion fees on crowded highways. I used to think we should raise the alcoholic beverages tax, but now I think we should eliminate it entirely. Instead, let’s put an “alcohol fee” in place that just happens to be higher than the current tax. Do the same for cigarettes. Legalize marijuana, but subject its sale to a rather hefty fee. It actually turns out that we could replace most taxes on labor and capital with a land occupancy fee, especially if we call it a “land occupancy fee” rather than a “land value tax.”

After reading this post, it made me think of Michael Sandel’s chapter about fines versus fees. Maybe some of the things that Yglesias is talking about in this post should actually be labeled fines and not fees. For instances, if we’re talking about internalizing the social cost of carbon dioxide, isn’t there a moral piece to it? That is, shouldn’t we call this a fine, then? You may disagree, but the nomenclature in this case does matter.

It seems a bit absurd to think that people would be more amenable to paying money for something merely by changing the label from ‘tax’ to ‘fee,’ but labels matter.

While it’s certainly a creative idea to start charging fees and lower taxes, there is an important bit to consider here. Namely, the control of these fees. Have you ever had to pay a fee to get your license renewed? Do you know how much it costs the government to ‘actually’ renew your license? I don’t. But I know that I get charged close to $100 to renew it. Josh Barro solidifies the point:

Politicians tend to regard fees as more palatable than taxes, and more focused too. If a state needs to finance an infrastructure to oversee fishing, why shouldn’t fishermen foot the bill? But groups like the nonpartisan Tax Foundation in Washington worry that governments are now using fees to shore up budget shortfalls rather than cover specific costs incurred by specific users.

“When it comes to paying for bananas, you’ve got the market as a mechanism to make sure you’re paying a fair price,” says Josh Barro, a staff economist at the Tax Foundation. “But when it comes to getting your driver’s license renewed, the government has a monopoly, and you have no idea what it costs the state or what it’s doing with the money.”

The moral of the story: maybe taxes aren’t so bad after all.

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.