How would a tax rate of 100% work?

I know this may seem like a dumb question, but I don’t really know how taxes work.

I hear that President FDR proposed a tax rate of 100% in the '40s for all incomes above \$25,000 (which today would be about \$400,000).

Does this mean what I think it means? Obviously 100% of \$25,000 is \$25,000, but this can’t be right.

I’m not asking for personal opinions of whether this would be a good thing or not, I just want to understand what it means. Say you make \$1,000,000 and are taxed at a rate of 100%. With how much disposable income would you be left?

I assume this means the marginal bracket system, which we use today.

So a 100% tax on all income above, say, a million dollars per year, would be something like this (totally hypothetically):

Income from \$0-50,000: 10% tax
Income from \$50,000-100,000: 20% tax
Income from \$100,000-500,000: 30% tax
Income from \$500,000-1 million: 40% tax
Income above \$1 million: 100% tax
The effect of it would be that nobody in their right mind would ask for a salary above \$1 million (such as NFL athletes, etc.) since none of that money would go into their pocket, it would all be siphoned off by Uncle Sam.
So to use a hypothetical example, let’s say **Muddibog **the star NFL quarterback is paid ten million dollars a year. In that case, he forfeits \$9,335,000 in taxes, and gets to take home \$665,000 as final net take-home pay.

And if that was just income tax, you would have to pay more for state taxes and Medicare taxes.

I gather that the government thinks that those who can pay should and those who can’t pay shouldn’t. In other words a guy who makes 50K but has 5 kids to support shouldn’t pay the same taxes as a single guy who makes 50K and spends it only on himself.

Once that difference—what you make minus what the government won’t touch because of burdens on you—is determined, the government decides what is taxed via a table.

I’m not familiar with what you cite about FDR but I’m guessing it means that after a certain amount of income, the government wanted to take it all. Sure they’d leave enough for a rich guy like Bill Gates to raise his family but the rest…?

The other side of that coin is, “Why would anybody strive to start a business or create new things if the money coming from it would just go to the government?”

Someone with more experience and relevant education will probably be along soon to explain better.

As given by the OP it could be EITHER a marginal escalating tax rate, increasing from (say) 30% tax on your income to \$5000, then increasing to 50% for income in the bracket \$5001-%10,000, and so on 100% tax on any income over \$25K OR it could be a simple flat tax of keeping everything you earn to \$25,000, then each dollar over that goes to the government.

There is also a third approach - to have a flat tax where (say) 30c in every dollar goes to the government.

Our system (Australia) has the first. This system is called progressive, more in the sense of changing as income increases rather than being how we do things in Utopia. The general assumption is that people on lower incomes spend a greater percentage of their total income on essentials, so the idea of a progressive tax is to minimise the tax impact on them, relative to the additional income spent on luxury yachts and gold toilets.

In the UK the highest rate of income tax peaked in the Second World War at 99.25%. It was then slightly reduced and was around 90% through the 1950s and 60s, but this only applied to salaries and not to other income such as dividends or interest from savings.

High taxes are ultimately self-defeating as wealthy individuals can employ experts to devise ways of getting around them. For example - back then there was no benefit in kind tax, so instead of salary, senior managers had expensive cars and other perks like school fees for their children. Ultimately, many high earners can move out of the country altogether if their ‘job’ doesn’t require them to stay too long. There’s a reason why Phil Collins, David Bowie, Lewis Hamilton et al live in Switzerland.

Even today, dividends are taxed at a lower rate, so many people choose to become limited companies and pay themselves a low salary but take dividends instead.

I found this quote-

So it’s a marginal tax rate of 100% on all income over \$25K , in effect putting a cap on net income.

You gotta hand it to people like McCarthy – they’ve had a lasting impact on the American consciousness. One of the presidents generally recognized as “great” by the American public said that in 1942. Just a few short years later, they were tossing “commies” in jail, and look at us today! “Socialism” is still a bad word.

That was during a World War. :rolleyes:

We are during a global pandemic, but half the country still wont shut up about money.

It wouldn’t work.

[Moderating]

Questions about what Presidents are great, or about what tax levels are wise, are for GD, not GQ.

[Not moderating]

Marginal tax brackets are the system used in most of the world, including the US, but they’re very commonly misunderstood. You’ll sometimes hear someone complain that a pay raise put them into the next higher tax bracket, and that they are therefore now taking home less money than they used to, but this never actually happens. If a higher bracket starts at, say, \$30,000 , and you got a raise that put you at \$30,500 , only that last \$500 would be taxed at the higher rate. You’re taking home less than you would if taxes were lower, of course, but an increase in salary will always mean an increase in take-home pay.

This is not, however, always true with various government benefits (medicaid, SNAP, etc.). With those, if your income exceeds some cutoff value, the aid goes away entirely, and so it is possible for a low-income earner to be hurt by a pay raise.

[Not moderating]

Marginal tax brackets are the system used in most of the world, including the US, but they’re very commonly misunderstood. You’ll sometimes hear someone complain that a pay raise put them into the next higher tax bracket, and that they are therefore now taking home less money than they used to, but this never actually happens. If a higher bracket starts at, say, \$30,000 , and you got a raise that put you at \$30,500 , only that last \$500 would be taxed at the higher rate. You’re taking home less than you would if taxes were lower, of course, but an increase in salary will always mean an increase in take-home pay.

This is not, however, always true with various government benefits (medicaid, SNAP, etc.). With those, if your income exceeds some cutoff value, the aid goes away entirely, and so it is possible for a low-income earner to be hurt by a pay raise.

On the hand more than 100% taxes on certain levels of income are not uncommon when you look at the safety net system in the United States. Up to a certain level of income you get Medicaid worth many thousands of dollars a year. A dollar more and you are no longer eligible for Medicaid. Likewise for public housing (at a different income level). The patchwork safety net system has lots of such disincentives and is a reason lots of us prefer a universal basic income (UBI) system.

I think the thing you’re missing is that this is a marginal tax rate. (A lot of people miss this.) A marginal tax rate means you don’t pay a single rate on all of your income. You pay one rate on a portion of your income and a different rate on a different portion.

So in the plan you describe a person would pay zero percent on incomes from \$0 to \$25,000. And then they would pay 100% on incomes from \$25,001 to infinity.

It would look like this:

Income: \$0 - Taxes: \$0 - Amount you keep: \$0
Income: \$10,000 - Taxes: \$0 - Amount you keep: \$10,000
Income: \$25,000 - Taxes: \$0 - Amount you keep: \$25,000
Income: \$25,001 - Taxes: \$1 - Amount you keep: \$25,000
Income: \$30,000 - Taxes: \$5,000 - Amount you keep: \$25,000
Income: \$100,000 - Taxes: \$75,000 - Amount you keep: \$25,000
Income: \$2,000,000 - Taxes: \$1,975,000 - Amount you keep: \$25,000

It depends on what you want to achieve.

If the idea is that it is un-patriotic to earn more than, say, a million dollars a year, then the government can pass a low that says they get every dollar over a million dollars a year. Then nobody makes more than a million dollars a year. If that is the problem you want to address, that will fix the problem.

If you want to raise revenue for the government, the problem is that then nobody makes more than a million dollars a year because it is a waste of time to earn anything over a million dollars a year. The marginal utility of the million-and-first dollar is zero. So nobody, or very few people, will bother. If the idea is to raise revenue for the government, then nobody is going to work just to raise revenue for the government. So the net effect of the tax is simply to repress economic activity. And compared to our current tax system, it is a huge loss, because currently people earning a million dollars a year get to keep most of it. The marginal utility of their million-and-first dollar is much more than zero. So the NBA stars negotiate for a ten million dollar contract, knowing that they will get (figures pulled almost at random) six million of it instead of one million.

So how would it work?

Unless it’s more important that no one makes a lot than that the government gets a lot more.

Regards,
Shodan

I remember reading an article about British incomes and the tax system. McCartney wasn’t exactly exaggerating when he wrote that. I looked it up in the late 80’s when I got into an disagreement with a local party functionary from the socialist party of the nation here in Canada. The top marginal tax rate when Thatcher took over was 84%. In those days, governments hadn’t figured out they should tax benefits, so one point was that it was more cost effective to give a senior engineer a paid-for car and hired driver than to give him a raise to spend how he liked. that was the net result of excessive tax rates. Add to that that yes, if you were poor you lost goodies like cheap milk and butter (not to mention free council flats) if income went up, and Britain was addicted to the dole mentality.

I assume that, like some politicians today (cough Bernie cough Sanders) there were people who looked at the mess of the depression created by Wall Street and reckless bankers (unlike, say, recent history) and were of the opinion they had to pay. Seriously, who nowadays in a regular wage-earning job earns \$400,000 or more? Whether you agree or not, you can see where some others might feel that such level of salaried income was not deserved by anyone. Certainly it would be hard to argue that limiting people to \$400,000 a year created an undue hardship.

It’s not that people won’t try to earn an extra million, they will just find creative ways to enjoy the fruits of their labor without giving it to the taxman. Business conventions in Hawaii, anyone?

The US top marginal rate was above 90% from 1951 through 1963 Historical Highest Marginal Income Tax Rates | Tax Policy Center

He also wasn’t Paul McCartney when he wrote that. He was George Harrison.