Why We Would Not Mind Paying A 70% Marginal Tax Rate

Why we don't mind a 70% marginal tax rate - and you shouldn't either

… If any suggestion of marginal tax rate applied to us. Presently, we’re not anywhere close to being high enough earners. But what if we were?

Let’s first explore what a marginal tax rate and tax rates in general. Norway and the rest of Scandinavia is commonly cited as a country with high taxes and high social welfare. Without going into details, taxes in the US have actually been higher than in Norway historically, for instance in the 50s, when Norway was incredibly busy rebuilding after WWII.

But let’s first explore what marginal tax rates are, and are not.

Marginal tax rates, explained

Let’s assume there is a marginal tax bracket, and it is 70% and starts at $200 000. An astronomically high number for most of us. If you earned, say $240 000 per year, what would your tax load be? Without going into the US’ complicate state and federal tax system, let’s say tax rates below $200 000 is 40%. In this simplified example, what would you pay?

The marginal tax system splits your income into two pieces. What you earned below the tax bracket and what you’ve earned above. It’s like a wealth income tax.

One piece is the “up to the marginal tax” piece, the $200 000. 40% of $200 000 is $80 000. That leaves you $120 000. The other piece is the $40 000 above the tax bracket, which is the only piece to be taxed at 70%.

70% of $40 000 is only $28 000, leaving you with a total of $148 000 in taxes, which is an effective rate of 62%. You still have $148 000 to do with as you want to! Well over double the median income in the US in 2017 (before taxes). Whew.

That’s more money than I even know what to do with.

Hello from the median!

At the moment, I earn around $50 000 before taxes. Of this, 35% goes to Norway in taxes. That leaves me $32 500 to play with. Of this, about $8000 goes to keeping a roof over our heads, $2000 for electricity, wifi and phones, while we eat around $3000 of this. That’s $13 000 total, or 40% of my take home pay covering relatively fixed expenses.

The rest goes to more discretionary expenses, like a bus pass in winter, a luxury electric bike, repairs on the house, going out to eat once in a blue moon, investing and saving. And we are not living with a particularly tight belt.

If I managed to keep this buying power relative to inflation for the rest of my life, I would be happy as a clam. Earning that much on my sidehustles seems a pipe dream, but anything is possible these days, right? I have enough money to save, to give, to travel and to buy funny fancy things in the farmers market every once in a while.

Even more importantly, we have enough of a cushion between income and expenses that we can bear the rise in interest rates that we have been warned about more than once.

What do people do with so much money?

Perhaps it is my working class background, or perhaps it is my autistic personality, but I’m not even sure what I would do if I had $148 000 after tax. Pay off our mortgage early probably, and hopefully donate a solid chunk. At $240 000 before tax, it wouldn’t even put me in the top 1% of income earners, but it would be really close.

I have a friend who earns almost 50% more than I do. Let’s say $75 000 before tax. Without knowing what they have in debt and savings, a 35% tax would have them owing $26 250 in taxes, leaving them $48 750 to play with.

Now, I suppose it says more about what sort of friends we keep than anything else, but at this income level, my friend always have money left at the end of their month. It sort of just… piles up. They pay a little extra on their mortgage and once in a while they buy a new lens on sale for their photography hobby, or perhaps a new computer game or a shovel for the garden.

But they always have money leftover. Even though they donate, even though they have an older car and buy what they want. I’ve tried to encourage them to invest some of it, but with limited success. These people are still miles away from any marginal tax rate suggestion, and they are snug like a bug in a rug. They are content, and they are comfortable.

Context matters

I know that comparing Norway to the US is even worse than comparing apples to oranges. Our cultures are different, our customs and our attitudes. Not to mention our trust in the government, with almost twice as many Norwegians saying they trust their government compared to in the US (data from 2014).

We may not agree with what our politicians are doing, but by and large, we trust our taxes to go to the welfare of the many, with incentives such as health care and social security. I know Danish MoneyMow shares my attitude on taxes, and his income is much higher than mine.

Why we would not mind paying 70% marginal tax rate - and you shouldn't either

I hope that if, and when, our income and wealth reaches a point where we enter a higher tax bracket, and where wealth tax kicks into effect, that we will look at our tax payments with pride. We are funding kindergartens, schools, roads, hospitals and the welfare state in general. I hope I will be just as proud as the author in Norway who aims to pay over one million NOK in taxes (link in Norwegian) every year (roughly $125 000). His income the year he managed to pay one million in taxes was almost as high as in the $240 000 example above.

With any luck, I hope we manage to live our whole life without whining arrogantly about our taxes. If and when we reach the higher tax brackets, we will be privileged to have enough to share with the many. There is pride in that. And I hope taxes stay as high as they are, despite the right’s promises of the opposite every election season.

If you earn over $100 000 after taxes per year, and you feel robbed by your taxes, perhaps it is time to check your privilege.

2 Comments on “Why We Would Not Mind Paying A 70% Marginal Tax Rate

  1. I was trying to get that page translated but I can’t! I’d love to know his motivations.

    I absolutely don’t trust our government, particularly now, and I think you know why.
    I also absolutely love that our local schools will be improved because we’re paying a serious property tax and locally I know what a difference that makes.

    We make high incomes as defined here in your relative scale and things still feel tight because our base COL is so incredibly high and we have astronomical childcare costs, but I still think it’s a good idea for people including us who make much higher incomes to pay higher marginal tax rates. Now whether I’d be happy about how THIS government spent it is a different story. *looks at Florida resorts with a sigh*

    • Yup, I completely understand why!

      I tried to look into US state/govt taxes and couldn’t figure it out, but I’m really happy that things like property taxes make a direct impact to your local community, that’s exactly the kind of thing that makes (some of) us proud to pay taxes here in Norway too. Of course, there are people I know here too who whine about having to pay the top income tax, but when I see how much they spend on their cars and houses, I can’t manage to feel sorry for them!

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