What Happens If You Tax Rich People Too Much?

Just for reference, I wrote this a while ago. Upon remigrating my blog, it seemingly slipped through the cracks. It remains unedited, though.

After the UK election ended, the world turned it’s attention to our neighbours France, who are divided across the country between several left and right wing parties.

At the height of it, I saw a tweet from Unusual Whales which stopped me in my tracks…

That’s right, a top tax bracket of 90% for the highest earners in the country.

After further research, it’s understood that this would be a 90% income tax rate on any income over €400,000 (roughly £335,000 or $435,000)

It’s an absurdly high tax rate, and a huge leap from the current highest tax bracket:

A 45% tax rate on income over €177,000.

So the big question is this…

Will this tax rate actually achieve what it’s set out to? Raise taxes on the wealthy, and lower taxes on those with lower incomes?

In short? No. Why?

Well, there are a few reasons, and in this blog, I’m going to answer the question…

What happens if you tax rich people too much?

How Much Tax Would High Salaries Be Paying?

With this proposed new tax rate, I’m going to work out how much tax you’ll have to pay at certain salaries, versus what the amount of tax was before the new tax rate (or what it is right now).

I’m going to work out the take-home pay for salaries of…

• €500,000

• €1,000,000

• €10,000,000

As of today, here are the France income tax rates, including the proposed 90% tax rate.

• 0%: €0 — €11,294 (TOTAL: €11,294)

• 11%: €11,295 — €28,797 (TOTAL: €17,502)

• 30%: €28,798 — €82,341 (TOTAL: €53,543)

• 41%: €82,342 — €177,106 (TOTAL: €94,764)

• 45%: €177,107 — €400,000 (TOTAL: €222,893)

• 90%: €400,000+

Let’s now work out how much tax you’d have to pay on these salaries, vs how much you would’ve paid without the 90% tax rate:

€500,000

Current tax rates…

Tax paid:

• Rate 1: €0

• Rate 2: €1,925.22

• Rate 3: €10,062.90

• Rate 4: €38,853.24

• Rate 5: €145,301.85

Total: €196,143.21 (39.23%)

Take home pay:

Total: €303,856.79 (60.77%)

New tax rates…

Tax paid:

• Rate 1: €0

• Rate 2: €1,925.22

• Rate 3: €10,062.90

• Rate 4: €38,853.24

• Rate 5: €100,301.85

• (New) Rate 6: €90,000.00

Total: €241,227.36 (48.25%)

Take home pay:

Total: €258,772.64 (51.75%)

Difference:

With the new tax rate, a person with a €500,000 salary would be paying this much EXTRA in tax:

€45,084.15

9.02% of their overall salary.

€1,000,000

Current tax rates…

Tax paid:

• Rate 1: €0

• Rate 2: €1,925.22

• Rate 3: €10,062.90

• Rate 4: €38,853.24

• Rate 5: €370,301.85

Total: €421,143.21

Take home pay:

Total: €578,856.79

New tax rates…

Tax paid:

• Rate 1: €0

• Rate 2: €1,925.22

• Rate 3: €10,062.90

• Rate 4: €38,853.24

• Rate 5: €100,301.85

• (New) Rate 6: €540,000

Total: €691,143.21

Take home pay:

Total: €308,856.79

Difference:

With the new tax rate, a person with a €1,000,000 salary would be paying this much EXTRA in tax:

€270,000.00

27% of their overall salary.

€10,000,000

Current tax rates…

Tax paid:

• Rate 1: €0

• Rate 2: €1,925.22

• Rate 3: €10,062.90

• Rate 4: €38,853.24

• Rate 5: €4,420,301.85

Total: €4,471,143.21

Take home pay:

Total: €5,528,856.79

New tax rates…

Tax paid:

• Rate 1: €0

• Rate 2: €1,925.22

• Rate 3: €10,062.90

• Rate 4: €38,853.24

• Rate 5: €100,301.85

• (New) Rate 6: €8,640,000

Total: €8,791,143.21

Take home pay:

Total: €1,208,856.79

Difference:

With the new tax rate, a person with a €10,000,000 salary would be paying this much EXTRA in tax:

€4,320,000

43.2% of their overall salary.

So, What Would Happen?

Let’s talk about what might actually happen if you tax high earners more.

Every High Earner Wouldn’t Just Get Up And Leave

Like most things, you can look at this like supply & demand.

If you increase the tax on high earners by X%, there’s likely to be some form of correlation between that and the % of people affected, who would look to operate elsewhere.

Like increasing the price of a product by X%. There would also be a % of customers who would no longer be willing to buy the product at that price.

If the average millionaire is now paying 30% more tax, the number of millionaires leaving the country wouldn’t be 100%.

It might be a fair amount, but not all of them.

Moving country is more complicated than a lot of people think.

You’ve got…

• Job

• Location

• Friends/Family

• Social life & standard of living

• Happiness & Fulfilment

• Weather

• Language barriers

• Loyalty/Patriotism

A lot of the time, it’s just not worth it.

I doubt that many high earners will be happy with paying higher taxes, but few will have the willingness to get up and leave the country because of it.

Instead, they’ll be more likely to look at doing this…

How People Earn Their Money Would Change

The people in charge tend to be very well off, even in left wing governments. So, they often have the control to change things behind the scenes without a lot of people noticing.

The point I’m trying to make is, when earning money, high earners tend to have access to… loopholes.

There’s several different ways you can earn money other than just through a salary, or “earned” income.

You might have a range of loopholes which allow rich people to continue to earn a lot of money, whilst avoiding the main tax streams that ordinary, working people have to go through.

So, if the top income tax bracket was to be raised to 90%, there’s a high chance that those affected by this, would look for other ways to earn money rather than a salary, which would qualify for income tax.

The main one, being dividends, or earning money via a business.

Obviously, you can only issue dividends to people who own shares of a company, so a lot of people wouldn’t be able to earn this route.

Under the assumption that a large chunk of high earners do have some form of ownership in a company, this won’t be a problem for them.

But, for those who don’t…

High earners could start their own business, and operate as a contractor/freelancer, rather than as a direct, full time employee of a company.

This way, you earn money via a business, which you can pay to yourself firstly as a (smaller) salary, to avoid the high tax rates, but then also via dividends, which is currently taxed at a flat 30% in France.

Ultimately, avoiding this new 90% tax bracket altogether.

Instead of…

Work > Pay via Salary

…it could be…

Work > Business Revenue > Pay via Salary, Profits & Dividends

Businesses will always pay less tax than people, because they have more power over those who make the decisions.

I think a lot of high earners could look at this if this was to become a reality.

It would also be cheaper for businesses to hire people this way, too.

With this method, contractors/freelancers would be happier to work for less than full time employees, because they’re paying so much less in tax via dividends, as opposed to income tax.

High Performance Industries Could Die

I’m thinking about footballers here, but this thought could apply to a range of other fields, too.

Imagine you’re a professional footballer. One of the best in the world, playing for PSG, or another top flight french side.

Salary of several million euros a year.

All of a sudden, you’re now paying 90% tax (pretty much double) on the vast majority of your earnings.

This ties in with the first point, but when you have the option to play elsewhere and keep a huge amount more of your money…

Why stay?

I mean, just look at the amount of world class footballers playing in the Saudi league now, a nation with no individual income tax burdens.

Yet, as shown above, someone with a €10 million salary in France now must pay over €4m Euros more in tax, every year.

This tax rate could have serious implications on things like high level sports, arts, and other areas where there are a lot of high earners, who have the ability to move elsewhere with relative ease and continue to do what they do.

Especially when big money areas like the US & Middle East are entering these competitive markets, you offer zero incentive for talented people to stay in France when they’re losing such a huge amount of their income.

This is the big downside, and it could be catastrophic for high performance industries like sports & arts.

Taxable Income Won’t Increase As Expected

As a result of the areas I’ve just discussed, the amount of tax raised won’t be as much as you think.

If, within an instant, you’re making high earners pay huge chunks more in tax, they may not leave the country, but they will take action to put their interests before others.

And the knock on effect could potentially be disastrous for the country.

There’s a reason why there aren’t 90% tax rates in all of the biggest and wealthiest countries in the world.

Whisper it quietly…

It’s because it’s stupid.

You Lose The Incentive to Be Successful

Imagine all the kids growing up aspiring to be successful, hard working adults only for them to realise that if you were to do that, a portion of your income would be taxed at 90%.

Where’s the incentive for success? Like, what’s the point?

Is 45% not enough?!

You’ll risk raising generation after generation of lazy, uninspired people who feel like they deserve everything to be handed to them on a plate.

And that, is a recipe for disaster.

Here’s the thing…

Not every high earner in your country is some greedy, piece of sh*t banker or politician looking to stockpile wealth and make your lives even more miserable.

A huge chunk of high earners are normal, hard working people, who happen to be very good at what they do.

And when you add an absurdly high tax bracket for the top earners, the outcome you’re expecting (higher tax revenue) is unlikely to happen.

People will find ways around it, as they always have done, or they’ll leave if they can continue to do the same work elsewhere, and in a place that will reward them more for their work.

For me, if you want to tax the rich more, you have to look outside of income tax, and look at greater taxes for dividends and the profits of a company.

Either that, or just become more efficient with the money you’re already raising as tax revenue.

Sure, you have the same risks of losing business to other nations, but one thing is for sure.

The big money is not in people.

It’s in business.

How to Really Tax The Rich

If you want to go about easing wealth inequality through reforming the tax system, you have to do it outside the realms of ‘income tax’.

Ultimately, income tax is a tax on time. It’s a tax on labour, on work. But given the fact that in most European countries, the top brackets for income tax are almost 50%, this isn’t really where the ultra wealthy are getting ahead.

No, they’re getting ahead through wealth, not work. Asset appreciation. Dividends. Compound interest. Capital gains.

Some rich person might be earning £300k a year, but if they has a real estate portfolio worth £10 million, and real estate goes up by 5% in a year, in terms of net worth, they’ve effectively tripled their income, plus rental income on top of that if they’re renting out homes. The only difference is that the extra £500k in value is an unrealised gain, so it’s not taxable.

You do this on a widespread scale and the rich are able to grow their net worths exponentially by owning assets, not selling (creating a realised gain which is taxable) the assets, and borrowing money to invest even further whilst using said assets as collateral in case they can’t pay back the loans.

They completely bypass the common method of work, spend, repeat. Their wealth building activities are in a completely different dimension. A dimension that in most cases is taxed at a much lower rate than income, and in some cases… isn’t taxable at all.

Here’s where you target. Dividends. Capital gains. Inheritance on large estates. You could even consider something like a tax on financial transactions so ordinary people can benefit from the exploitative nature of financial markets like Foreign Exchange, which trades several trillion dollars every day.

Leave income tax alone. 45% is already enough.

Taxing the rich isn’t about taxing highly paid professionals like doctors. No, they’re already taxed too much, if anything. It’s about taxing wealth, not work. Taxing those who can sit on their arse and have their net worths go up by eight figures a year all because the monetary system is fucked, whilst everyone else slaves away at their shitty blue collar jobs having to fork over a larger chunk of their money.

Governments across the globe lose half a trillion a year to tax avoidance, but these mugs want to raid income? Come on, man. You’ve got it all wrong.

Wealth, not work. That’s how it’s done.

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