Wednesday, March 30, 2011

The Oddest Story of the Day: The Price of Taxing the Rich

And there were many to pick from, including the bad manners of the Dane County Republican Party in Wisconsin and Sean Duffy's difficulties of getting by on only 174,000 dollars.

But this story I just read is the weirdest of all:
Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes—their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them.


This growing dependence on wealthy taxpayers is being driven by soaring salaries at the top of the income ladder and by the nation's progressive income taxes, which levy the highest rates on the highest taxable incomes. The top federal income-tax rate has fallen dramatically over the past century, from more than 90% during World War II to 35% today. But the top tax rate—which applies to joint filers reporting $379,000 in taxable income—is still twice as high as the rate for joint filers reporting income of $69,000 or less.


"These revenues have a narcotic effect on legislatures," said Greg Torres, president of MassINC, a nonpartisan think tank. "They become numb to the trend and think the revenue picture is improving, but they don't realize the money is ephemeral."
Kicking the addiction has proven difficult, since it's so fraught with partisan politics. Republicans advocate lowering taxes on the wealthy to broaden state tax bases and reduce volatility. Democrats oppose the move, saying a less progressive tax system would only add to growing income inequality.


Historically, California's tax revenues tracked the broader state economy. Yet in the mid-1990s, Mr. Williams noticed that they had started to diverge. Employment was barely growing while income-tax revenue was soaring.
"It was like we suddenly had two different economies," Mr. Williams said. "There was the California economy and then there were personal income taxes."
In all his years of forecasting, he had rarely encountered such a puzzle. He did some economic sleuthing and discovered that most of the growth was coming from a small group of high earners. The average incomes of the top 20% of Californian earners (households making $95,000 in 1998) jumped by an inflation-adjusted 75% between 1980 and 1998, while incomes for the rest of the state grew by less than 3% over the same period. Capital-gains realizations—largely stock sales—quadrupled between 1994 and 1999, to nearly $80 billion.
Mr. Williams reported his findings in early 2000, in a report called "California's Changing Income Distribution," which was widely circulated in the state capital. He wrote that state tax collections would be "subject to more volatility than in the past."
Mr. Williams wasn't the only one noticing the state's dependence on the wealthy. Economists and governors had for years lamented the state's high tax rates on the rich, and in 2009 a bipartisan commission set up by then Gov. Arnold Schwarzenegger recommended an across-the-board reduction in income-tax rates and a broader sales tax to reduce the state's dependence on the wealthy.
And so on and so on. It's a shocking article, though you may have to read it a few times to get the message: States should tax the rich less because the income of the rich is too volatile and too hard to predict and because it goes up in boom times and down in slump times. If the poorer income classes bore a bigger share of taxes we would have less volatility!

The alternative conclusion is the obvious one: The rich are taxed because that's who has the money.

The American income distribution is very unequal, the engines of economy are now very dependent on the super-rich (as they were right before the 1929 Wall Street Crash) and we should focus on fixing that particular problem. But yeah, I guess the alternative is to Leave The Rich Alone and cut back on all forms of government spending, including the infrastructure.