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.