I. The Progressive Tax Scheme
Suppose you are a well-off businessman in the idyllic land of Fictitioustan, pulling down a cool $1.2 million salary for your contribution to the profits of your employer and generally enjoying life. The surprisingly lenient government of your workers’ paradise has in its infinite wisdom set a tax rate of 10% on all income. All in all, $120,000 seems like a reasonable enough contribution to the public good, and you are not much concerned.
But as time ticks on, this government, with its generally benevolent tendencies, discovers a social emergency. Perhaps Fictitioustan ends up in a small war, or the bureaucracy wants to be paid better, or the people’s well-meaning representatives have come up with a new project, or science suggests society would be better off with publicly provided Whateverium. And the money has to come from somewhere, so the overseers of the state’s welfare decide to institute a scaled tax, where the old 10% rate still applies, but after $100,000, it jumps to 20%, and at a million, 30%.
Your well-off self does the calculations and is moderately surprised to find that the result of this change is that you now are set to pay out $250,000 – which is to say your tax bill has more than doubled, and you are paying over approximately 21% of your income. But that does still leave you $950,000, and while not quite as eye-catching as the even million, it’s certainly nothing that would leave you begging, and the public’s needs are important, so all in all you remain content with your lot, if perhaps a little curious quite how dire the emergency is and how long it will go on.
II. The Cost of a “Stable” Income
Now suppose you are no longer a wealthy but unworried millionaire, but instead a coldly calculating one – Tony Stark, but without the genius or philanthropy (or witty banter). Before, you pulled down $1,080,000 at the end of the year; being vaguely inclined to be careful with your money, you kept that $80,000 to “live on”, but you are absolutely adamant that you want that whole million to spend on – well, use your imagination. Whatever you want. The point is, you want to keep having your $1,080,000 to spend, and so you hire an accountant to figure out how much of a raise you need to demand.
Some quick subtraction reveals that your current $1.2 million salary leaves you $130,000 short of your goal. But it is not quite as simple as demanding a $130,000 raise – though even that much might raise eyebrows in HR, what with it being over 10% of your current pay. The catch is that you would have to pay taxes on that new $130,000, too – so your salary would now be $1.33 million, but your tax bill is now $289,000, and you are still $39,000 “short”.
To sum up: you now pay $190,000 in taxes on your first million dollars, and so you end up with $810,000 left; you need to make up $270,000 after taxes to continue to bring in your $1.08 million when everything is done. But since glorious Fictitioustan will be taking 30% off the top now that you have hit seven figures, that $270,000 is only 70% of what you really need – the actual number is $386,000 past $1 million. So the raise you want to ask for – your accountant reports nervously, while presenting you with a large bill you are not quite sure was justified by his ability to work out an 8th grade math problem – is a nifty $186,000, or 15.5% over what you’re making now. Which, to put it in perspective, would be roughly 5 years worth of raises indexed to an assumed (and not, as I understand it, too uncommon in reality) 2.5% rate of inflation.
In the somewhat fantastic realm of incomes discussed here, I find it hard to imagine the difference in taxation making much practical difference to anyone’s life, beyond unpitied hardships for somebody’s offshore bank account. On the other hand, I do want to hint at a potential problem with tax policies which often does not seem to be considered with much care.
In point of fact, US tax brackets (for example) are nowhere near Fictitioustan’s new – I would call it reasonable-seeming, in order to not say obnoxiously high – tax policy. Around $100,000, the US income tax jumps to 28%; around $450,000 – after a couple gradations – almost 40%. There are no brackets for the millionaire and billionaires in the normal tax schedule; and likely it is as well there are not, as even the highest there is is – well, extortionately high.
Admittedly this is without considering exemptions and loopholes and subsidies and all the rest of the gnats of the administrative bureaucratic deal-cutting – I am going to turn into Treebeard here, so as you call them, this vermin of tax laws and IRS regulations. One of those, for instance, is the capital gains tax rate, which is in the first place bizarrely counted differently from other income (this is one problem), in the second place is still taxed anyway at 23.8% (this is another but totally different problem), and in the third place is currently subject to proposals to raise it to – while keeping it separate! – 28% (this is an absurd way to try to fix the problem). And so we come around to the question of raising taxes and why I wrote this whole thing.
The questions I am asking – in long-winded fashion; if I were still in school instead of teaching it I might be in danger of being told not to pad my essays just to reach a word count – are these: how are earners going to react to paying further taxes? And if – as I suppose many members of the human race would and will – they attempt to deal with it by making more money to soften the blow, where is that money coming from?