Effects and Implications of 100% Income Tax Rate

[bagasme]

Hello all,

Suppose that in a monopoly game (board game), a player passed through Go and receive $2000 as salary. Then he landed on Income Tax and he paid $2000 too. It means that he paid 100% tax rate, in other words he paid all of his salary only for the tax.

What the effects and implications if the same tax policy (100% income tax rate) applied in real life?

 

[BvU]

No one works any more and the government has to feed and care for everyone

 

[bagasme]

No one works any more and the government has to feed and care for everyone

Did you mean working on jobs which the salary can be taxed?

 

[Borek]

The higher the taxes, the more people hide in an underground economy.

 

[symbolipoint]

Farm workers of many different types at one time were taxed that way.

 

[member 656954]

Suppose that in a monopoly game (board game), a player passed through Go and receive $2000 as salary. Then he landed on Income Tax and he paid $2000 too. It means that he paid 100% tax rate, in other words he paid all of his salary only for the tax.

I'm assuming you understand this is not a true "100% tax" model, as it requires a windfall passing Go and then the (unlucky) chance of landing on Income Tax while also not picking up any rental revenue from other players during this 'salary to tax' cycle.

But if 100% was applied in real life, it would obviously act as a disincentive to work unless the Government then 100% provided for the entire taxpayer needs.

There might be expenses that could be applied to offset the 100%, and perhaps this would bring the effective tax rate to something acceptable. Belgium has a top progressive rate of 50% and a social security tax of 13.07% of their income, which seems a reasonable slug to the highest income earners. Their unemployment rate is about 5.6%, so the highest taxation rate is clearly not a serious disincentive to working.

I would think (with no ready research to back this up) that taxation and the services provided from it need to feel equitable to the taxpayers or discontent will result. Paul Ryan had a view somewhat on this, back in 2011, but it seems partisan in tone so needs to be considered in that light and is not research of the kind expected on PF.

 

[russ_watters]

But if 100% was applied in real life, it would obviously act as a disincentive to work unless the Government then 100% provided for the entire taxpayer needs.

It's a disincentive to work (legally) either way.

 

[Rive]

What the effects and implications if the same tax policy (100% income tax rate) applied in real life?

Loss of motivation and increased urge for tax evasion.
The leading party loses popularity, elections, maybe: life

 

[kyphysics]

It's a disincentive to work (legally) either way.

Sort of agree. I think people would still work to some degree, as a society would still need to produce goods and services to survive. But, to me, it'd be a huge disincentive to work hard. Who the hell would work their hardest if they couldn't keep most of what they created - let alone giving up 100%?

Quality of life/standard of living would go down collectively for everyone as well.

You need a tax rate that allows government to fund certain basics: military, education, judicial system, etc. But, you don't want it so high as to be unfair to people and also disincentivize work.

 

[kyphysics]

The higher the taxes, the more people hide in an underground economy.

You could also just move to Switzerland or Singapore - two of the more famous tax havens.

 

[russ_watters]

Sort of agree. I think people would still work to some degree, as a society would still need to produce goods and services to survive.

Society's need and an individual's need are two different things. If the individual keeps nothing, why is it an incentive for him that other people benefit from his work while he doesn't? I'm not seeing the incentive.

 

[phinds]

Until the advent of China's explosion in the last 2 decades, America in post-WWI was the most vibrant economy the world had ever seen. And yet ...

They say that people who don't know history ... aren't very good at math either.

 

[jtbell]

However...

The 91 percent bracket of 1950 only applied to households with income over $200,000 (or about $2 million in today’s dollars). Only a small number of taxpayers would have had enough income to fall into the top bracket – fewer than 10,000 households, according to an article in The Wall Street Journal. Many households in the top 1 percent in the 1950s probably did not fall into the 91 percent bracket to begin with.]

When we look at income taxes specifically, the top 1 percent of taxpayers paid an average effective rate of only 16.9 percent in income taxes during the 1950s.[4]

That is, the 91% marginal rate applied only to that part of their income above $2 million $200,000. The rest of their income was taxed at lower rates.
https://taxfoundation.org/taxes-on-the-rich-1950s-not-high/

 

[phinds]

However...That is, the 91% marginal rate applied only to that part of their income above $2 million. The rest of their income was taxed at lower rates.
https://taxfoundation.org/taxes-on-the-rich-1950s-not-high/

All very true. I was only pointing out that the marginal rate in the US was MUCH higher than almost anyone under 50 today is at all aware of.

 

[Vanadium 50]

The 91% tax rate is not relevant. It was marginal, not absolute, applied to fewer than 10,000 people and most of the people at risk for paying it got most of their income from sources taxed at a lower rate, like capital gains. It adds heat and not light.

The OP is unclear on the tax strategy he is proposing. Is it that most people are taxed at zero but some random fraction, say 20%, are taxed at 100%? If so, why would anybody want to do that? Why not simply tax everybody at 20%? Or is it a 100% income tax levied on everybody, with the state then providing all goods to the populace? That was tried in Cambodia from 1975 to 1979.

It did not go well.

 

[kyphysics]

Society's need and an individual's need are two different things. If the individual keeps nothing, why is it an incentive for him that other people benefit from his work while he doesn't? I'm not seeing the incentive.

As in...if no one works, then everyone starves. SOME work must be done is all I was saying.

 

[russ_watters]

As in...if no one works, then everyone starves. SOME work must be done is all I was saying.

Sure, but who does it and why? I'm not going to work for no personal benefit unless someone forces me to. Would you?

 

[BWV]

There were also plenty of loopholes to shelter income back in those days - the Texas economy in the 1970s and early 80s was driven by non-economic tax-driven commercial property construction

But what was probably the biggest lost deduction for wealthy individuals was the elimination of deductions on passive investment losses on real estate. Before 1986, wealthy individuals would often buy real estate with no hopes at all of it cash flowing. That wasn’t the point. The point was that real estate is depreciated every year in the eyes of the IRS. Even though in the long run, properties usually go up in value, the IRS assumes that every twenty-seven-and-a-half years a property’s value will depreciate to zero.

This “loss” can be written off. So, for example, say a man earning $100,000 a year buys a property worth $275,000. He rents out the property and breaks even on it. The tax code allows that person to write off $10,000 as a loss which he can count against his income for that year. So now he only has to pay taxes on $90,000. If he owned ten such properties, his income would be zero, at least according to the IRS.

Despite the higher marginal rates, the overall Federal take was about the same back then as it is today:

https://mises.org/library/good-ol-days-when-tax-rates-were-90-percent

 

[kyphysics]

Sure, but who does it and why? I'm not going to work for no personal benefit unless someone forces me to. Would you?

If you were forced to live in such a nightmarish world and there wasn't the option to just move away, I think you'd still have some small incentive to do some work. No doubt that it'd be depressing as hell and just the thought of someone taking 100% of your gains and redistributing it as they saw fit would surely be de-motivating as heck. There would be days I'd probably say: "Forget it. I'm not working hard today. I'm going to just relax and do nothing. This is all pointless."

Yet, at some points in time/days, I (and others) would still work work (or, at least, I'm willing to bet). If that is the only system you have, you have to deal with it. SOME work must be done just to survive. I think people would still put in some work knowing that it did some small amount of collective good. Might there be a person who just didn't work at all and tried to freeload off of everyone else's labor? I could easily imagine that.

This is all speculative. But, I tend to believe that the majority of people would still put in some work and it would be a minority who did no work at all.

I merely think:

a.) it would disincentivize truly hard work
b.) overall societal standard of living would go down
c.) it would be mentally/emotionally depressing as hell

But, yes, some/most people would still do some work - if for no other reason than mere survival.

 

[Vanadium 50]

There would be days I'd probably say: "Forget it. I'm not working hard today. I'm going to just relax and do nothing. This is all pointless."

The Cambodians set up an "incentive program" to deal with that. That attitude was quickly eliminated.