I don’t have any firsthand knowledge of this, but I seem to recall reading a Time article as a kid in the 70s that discussed the high taxation in Sweden. Specifically, after one tax increase the top bracket edged over 100% (either 100.2% or 101.2%). This meant, as the article made clear, that for every Krona you made over that limit, you actually lost money (e.g. a person slightly over the line would have less net income after taxes than someone lightly below that line). I also recall the article alluding to the posibility of income flight, by individuals like ABBA [collectively cited --as bizarre as it sounds-- as second only to SAAB in net annual income in Sweden] who might otherwise find themselves reduced to penury. The Swedish government reportedly said it was “a mistake” and would be corrected the following year.
There were many details in that article that now seem suspect. I can certainly name many stranger economic facts, but I have been unable of locate confirmation of my recollections on the web.
Discussion and, especially, citations would be most welcome
It was true for self-employed people, who had to pay taxes as both employer and employee. This report documents a maximum marginal income tax rate between 83% and 87% in Sweden in the late 1970’s. The fact that employer taxes could push it over 100% is alluded to briefly in this story:
The fact is also asserted in passing by Charles Adams in For Goor or Evil: The Impact of Taxes on the Course of Civilization, albeit with no footnoting:
No, if you earn $1 million, you pay $1500 (the tax from the second bracket) + $4000 (the tax from the third bracket) +…+ 105% of the range of the highest bracket – that’s how brackets work; you don’t pay the highest rate on ALL of your income, you pay the same amount as the po’ folks on the first few thousand, and so on.
Look at hajario’s brackets again. You are not taxed the entire percentage on the entire amount you earned.
So, for 5% of all money earned between $20,001 and $50,000, that’s 5% of $30,000 (rounded for simplicity) = $1,500.
Plus 10% of all money earned between $50,001 and 90,000, which is 10% x $40,000 = $4,000. So if you earned $90,000, you pay $1,500 + $4,000 = $5,500. (0% for the first $20,000.)
The 105% applies only to a certain PORTION of your income. Say if the 105% bracket is from $900,001 to $1,000,000, that means that you pay 105% on the top $100,000 of your income, or $105,000, added to all the lower percentages from the lower brackets.
You parsed “X% of all money earned between Y and Z” as
“(X% of all money earned) between Y and Z”
rather than as “X% of (all money earned between Y and Z)”.
To be honest, Í’m not surprised at how many people even in progressive-income-tax jurisdictions make that mistake at first.
And let’s remember that others have pointed out there was no actual “105%” bracket, but that it was an effective rate of 105% when you added an 85% personal-income-tax top bracket to a 20% business-tax bracket.
I’d venture to guess that 50% of the people in the US do not understand this. Why else would we have a continuous call to “simplify” the tax system with a “flat tax”?
For some reason, brackets are confusing enough to people that they think that brackets are what is wrong with the tax system, rather than the billion exemptions and shelters written for social engineering and political favors.
It’s not the flax tax alone that would do it. It’s the flat tax in conjunction with the elimination of every deduction that would make it simple. No, you can’t just eliminate every deduction with the existing brackets. And you’re political suicide if you just say, “hey, we’re eliminating deductions.” Hence flat tax equals all new tax system including the elimination of deductions. (I, for one, would pay a lot more taxes in most of the proposed flat systems because I have many deductions.)
To be fair, at least some of the people in favor of a flat tax want the destruction of brackets to be part of a more general simplification of the tax system which would also eliminate most, if not all, exemptions and shelters.
I agree that brackets are misunderstood by a large group of the population.
This is also dreamland. The problem is not simple deductions. The real tax sharks are not the people who earn wages and get a W-2 every year. The real thorny parts are based on what we define as income.
Take rental income - You buy a property and rent it out. You are paid rent. Do you take this as your income, even though it all goes to the mortgage? Of course not, this would destroy the rental industry. So what net income are you taxed on? Rent minus direct mortgage? Rent minus purchase price ammortized over a certain number of years? Rent minus ammortized purchase price minus upkeep? Does your vehicle count as a work expense that goes towards upkeep?
Now throw in corporate executives who are paid in options. Now throw in corporate executives who are paid in options on rental corporations. And these examples are based on simple accounting without even considering favorite industries or social engineering. Tax simplification is a pipe dream. The world is too complex.
And politicians know this. Flat tax proposals are the basest pandering to those who haven’t really thought about it. Which is most people. You may have thought it through more, Balthisar, but you’d be the exception to the people I’ve talked to. Especially since people don’t realize that a deduction free flat tax would have to be in the range of 30% to maintain current revenues. (Number off the top of my head. But people I talk to always think a flat tax would be like 10%.)