The Problem with Taxing the Rich

Why are states like California in dire budget crises nowadays? Sure, state expenditures have risen quite a bit, but according to Brad Williams, a former economic forecaster for the state of California, the root cause of all these budget woes is the states' reliance on taxing the rich.

Before you reach out for the metaphorical pitchfork, consider this:

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.

Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California's over-dependence on the rich. "We created a revenue cliff," he said. "We built a large part of our government on the state's most unstable income group."

New York, New Jersey, Connecticut and Illinois—states that are the most heavily reliant on the taxes of the wealthy—are now among those with the biggest budget holes. A large population of rich residents was a blessing during the boom, showering states with billions in tax revenue. But it became a curse as their incomes collapsed with financial markets.

Arriving at a time of greatly increased public spending, this reversal highlights the dependence of the states on the outsize incomes of the wealthy. The result for state finances and budgets has been extreme volatility.

Robert Frank of the Wall Streeet Journal explains: Link

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@ Rob, Your question baffles me. How do you think the Social Security Trust Fund was created without a surplus in the preceding years? This is the first year that Social Security has run a deficit (a fact I also noted in my original post). I'm not arguing that it doesn't need some changes (gradually raising the SS retirement age to account for our increased lifespans would be a start), but arguing that it isn't funded right now by SS taxes is simply denial of reality.

As for inflation, why is it that you think that problem only applies to the top tax brackets? ALL tax brackets need to be adjusted with inflation (and they do get adjusted).

This has nothing to do with the government being Robin Hood. The wealthy benefit the most from virtually everything the government does. It provides transportation, water, and electric infrastructures to allows businesses to run. It imposes tariffs and provides subsidies to protect the price of goods. It uses it political weight to prevent unfair trade practices in foreign countries from gutting local industries. It keeps workers alive and healthy(-ish) so they can keep working at otherwise unlivable wages. All these things primarily benefit corporations, and therefore those with the big payouts from corporations, far more than the average individual.

Almost every rich person out there likes to pretend their wealth is created in a vacuum, but its not. It's a product of the environment they exist in, which is provided by the government and people of the United States. If they really think there's a better environment out there for creating wealth, they'd already be there. But most choose to stay here, because they know that's where their wealth comes from, even if they won't admit it. And paying for the right to reap that reward is not asking too much.

@pooliejoe, national sales tax often sounds very simple and appealing, but it turns out to be a very regressive tax system. There is a simple base cost of staying alive that cannot be avoided (food, water, clothing, housing, transportation to and from work, etc). If you barely make enough money to meet that level (and a large number of people do), your effective tax rate is the sales tax rate. It's also been shown repeatedly that the wealthier you are, the lower your marginal spending rate is. That is, you spend less of every new dollar added to your income. That means the wealthier you get, the lower your effective tax rate is going to be, because you spend fewer of those dollars. You end up shifting even more of the tax burden on those who can least afford it, while those who can most afford it reap most of the rewards.

And BTW, despite your suggestion, the estimates they came up with to have just a national sales tax cover everything was in a baseline 20-25% range, possibly more. Sure, that might increase the effective tax rate on Warren Buffet and a handful of other rich people, but mostly it would just increase the tax rate on the poorest people, who already live paycheck to paycheck.
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I simply think that the way our tax code was created a century ago is the reason we are so screwed today. The progressive era of American history led to the addition of the 16-18th amendments. First, the established the income tax, and for the first time the government had the "right" to look into each and every person's wallet and take a "fair" amount out. The second one was the abolishment of the way senators were elected. Prior to the 17th amendment senators were elected by state representatives and not by popular vote. and finally, these progressive minded individuals passed the 18th amendment, and for the first time americans were denied a comodity.

This isn't right vs left, its reason vs progressive thinking. All progressive thinking can be summed up in one sentence. "I am a progressive, I believe that a person should recieve something for nothing." The only problem is absolutely nothing in this world is free. charity for those less fortunate should be given freely, and not taken by force from people who truely fund everything.

those on this board that argue the rich should pay more can simply not suggest a way to do just that without adding to our overburdoned tax code. Take this example: General Electric has not payed a dime in corporate taxes in the last three years, the simple reason why is that they have an army of lawyers and payed for politicians that created the loopholes all of you guys are screaming about. a small buisnessman can not afford an army of lawyers, and therefore pays a larger percentage of his earnings in taxes than those ridiculously wealthy individuals who can get around everything. He does it simply because he's not thinking about taxes all the time like the lawyers, he's thinking about his buisness. ALL OF THIS IS BECAUSE OF THE 16th FREAKING AMENDMENT!!!!!

Here is an idea for everyone, i hope alex can read this and post it as a simple compromise to our insane tax system.

The government can only issue sales taxes. sales taxes can not excede 10% on purchases less than or equal too $500,000 dollars, can not exceded 15% on purchases less than or equal too $5,000,000 dollars, can not excede 20% on purchases less than $10,000,000. and can not exceded 25% of any purchase made legally through the united states of america.

i think that would be a great way of doing things, the government would not have the right to see how much money you make. it can only have the right to tax you on what you BUY. rich people buy EXPENSIVE THINGS, therefore they will spend MORE money than the poor will and therefore pay EXPONETIALLY more money in taxes. all staying legal of course.

the tax problem is so confusing nowadays but it can truely be simplified to what i was just suggesting. "I am buying supplies for my factory, i need to spend 50K on supply X, well, now i as a small buisness KNOW that I will not spend more than 10% on taxes." no lawyers, no four hour a sleep nights reading every inch of law to make sure you're not liable for 8 years in prison.

seems pretty fairminded to me, and while those who scream for class warfare continue their sprint off the cliff of insolvency, i want to find those willing to admit A) we need to change the way things are run, B) give individuals more freedom over their finacial lives, and C) create simple systems of governance that do not favor anyone over anyone else.

we currently live in a world where C) is openly laughed at by those with the correct connections, we have to change this with reason and not with handouts, welfare, and sob stories.

we should be a nation of laws not men, where everyone has the same opportunity to both succeed AND fail.

and for everyone who still thinks our problems and debt can be payed for by the rich, whats plan B?

youre going to first tax the rich, whos next? its the middle class, and even then we cant cover everything, so whos next?

we need to shake things up in america, i think this article is perfect for highlighting the number one flaw in our system of governance, and that is how we collect taxes.
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@rob, are you talking about the proposed 250k mark above which income would be taxed an additional 2%? I loved hearing about the people who said they would have no incentive to make over 250k when each dollar above that would be subject to an additional 2 cent tax. I hope they don't get mad and won't give people jobs! I'm sick of charity for the super wealthy.

Taxes fund things like roads, wars, government assistance for the working poor and all kinds of things rich people like and use. It is hardly theft or charity.
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@Charles "The average small business owner or chief executive brings home an annual salary of $233,600, according to's 2006 Small Business Compensation Survey." Not the magic $250K number, but pretty darn close. Enact tax laws now with that as the "rich" benchmark, and not much time will pass (given inflation) before large numbers of small business owners start feeling the impact. Yes, CEOs are included in the same survey as many small businesses (particularly those large enough to employ people) operate as an S corp. Regardless, these are the people we are looking to tax more... the very same people making business decisions that effect employment.

I don't know where you get your information about social security running a surplus. According to the Congressional Budget Office, this year social security is projected to collect $45 billion less in payroll taxes than it pays out. Going forward, the CBO projects social security running deficits every year until its trust funds are eventually drained in about 2037.

The government is a very poor stand in for Robin Hood. Charity should be in the hands of the people, not forced by politicos that squander it. I don't believe anyone (rich or poor) is any better off paying more taxes until the government makes a serious effort to cut waste and curb corruption. Excuse me... there is one (and only one) group that does indeed benefit from increased taxes and that is politicians... the last people you want benefiting from it.
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@Rob, First, over 90% (I forget the exact number at the moment) of small businesses make less than $250,000 a year in income (they are allowed to deduct all costs associated with running the business from their revenues, including paying their employees, meaning they have less than $250,000 in profit). So when we're talking about the marginal tax rate for wealthiest Americans, the vast vast majority of small businesses do not fall into the category being discussed.

Second, payroll taxes account for the same percentage of federal revenue as income taxes (just over 40%). Talking about what percentage of the income taxes come from each bracket is a smokescreen used to justify selfish or ignorant action. Payroll taxes go to cover the social services people most often cite (Social Security, Medicare, Unemployment Insurance), and until this year Social Security ran a surplus which was being loaned to the general fund to cover expenses that other taxes (including income taxes) could not cover.

Note also that the wealthiest Americans benefit most from the expenditures of the general funds. These go to pay subsidies to corporations, which can directly affect their income, but increases in the general economy also benefit those with large investment portfolios the most. Employment right now is just barely starting to recover, but the stock market is back above 12k and a non-trivial number of companies are reporting record profits. So who really benefited the most from economic stimulus?

Understand that all my reasoning does not come from any sense of jealous too. I AM one of the lucky ones who has a six figure salary. But paying slightly more in taxes is not going to significantly affect my lifestyle and has no perceivable effect on my happiness. And yet it can leave a large number of other people much better off, and most likely increase my stock portfolio value more than enough to offset the short term reduction.
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