How would a 100% tax on the rich even work? A lesson on "real" tax rates from the French
You read that number right. Jean-Luc Melenchon, the socialist candidate and one of four frontrunners in France's upcoming national elections wants to raise top marginal taxes on the rich to 100%. That's more than double France's current top rate of 45%, as CNNMoney reports.
So how does a 100% tax even work? Wealthy people might not be thrilled. That's because the tax effectively places a cap on income: Every dollar (well, Euro) above $425,000 would be taxed at the 100% rate, making it arguably pointless to earn more than that, since the government will just take it.
Now, Melenchon's 100% tax would (of course) be marginal — not "effective" or "real" — meaning it would apply only to that portion of income above about $425,000 per year. All money earned up to $425,000 would still be taxed at a lower rate. Confused yet?
Here's an example from PWC, using the current income tax brackets in France: If a married couple earns about $47,620 (or an average of $23,812 each), their household technically falls into the 14% tax bracket. But because that is a marginal rate on just the upper part of their income, they end up paying about $3,758 in tax — only about 7.9% of income, aka their effective tax rate.
Similarly, in the United States, if you're a singleton making $100,000, you're in the 28% tax bracket; but your effective tax rate is only about 21%.
In other words, as extreme as 100% might sound, no one's going broke because of it. Still, it's a bit of a moon-shot idea. Current French President Francois Hollande has already tried in the past to raise the top tax rate to 75%, in a move that was rejected by French courts.
After all, France already has relatively high income taxes, and last year lost 12,000 millionaires to expatriation, more than any other country.
Yet, as John Oliver pointed out during his April 16 segment, this year's French elections are particularly unpredictable, and Melenchon has reportedly been surging in polls. In short, this pie-in-the-sky tax proposal is not an impossibility.
How do you figure out your real tax rate?
Like France, the United States uses marginal tax rates in a progressive system that tries to shift the burden toward wealthier taxpayers. The idea is that the more you make, the more you can afford to pay — but under a certain amount, the base of your income will be protected from higher tax rates.
For example, a millennial who makes the average income of roughly $35,000 per year would be in the next-to-bottom tax bracket of 15%. But their first $9,275 would be taxed at only 10%, the rate for the bottom bracket: This system is why effective tax rates tend to be lower than marginal tax brackets.
For that average millennial, taking a standard deduction? Using the calculator, the tax bill would be a little more than $3,200, aka an effective rate of only 9%. That's not nothing, but it sure beats 15% — or 100%.
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