The Price of Taxing The Eeeeevil Rich

The number of wealthy people to use as a sponge is shrinking.  What will happen when the socialist utopia of wide-spread peasantry is finally achieved?

As Brad Williams walked the halls of the California state capitol in Sacramento on a recent afternoon, he spotted a small crowd of protesters battling state spending cuts. They wore shiny white buttons that said “We Love Jobs!” and argued that looming budget reductions will hurt the Golden State’s working class. Mr. Williams shook his head. “They’re missing the real problem,” he said. The working class may be taking a beating from spending cuts used to close a cavernous deficit, Mr. Williams said, but the root of California’s woes is its reliance on taxing the wealthy.

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.

In New York before the recession, the top 1% of earners, who made more than $580,000 a year, paid 41% of the state’s income taxes in 2007, up from 25% in 1994, according to state tax data. The top 1% of taxpayers paid 40% or more of state income taxes in New Jersey and Connecticut. In Illinois, which has a flat income-tax rate of 5%, the top 15% paid more than half the state’s income taxes.

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.

The future of federal income taxes on the wealthy remains in flux. The top tax rate is 35%, following the Congressional tax battle last year. But in 2013, the rate is scheduled to go back to 39.6% unless Congress takes further action.

State income taxes are generally less progressive than federal income taxes, and more than a half-dozen states have no income tax. Yet a number of states have recently hiked taxes on the top earners to raise revenue during the recession. New York, for instance, imposed a “millionaire’s tax” in 2009 on those earning $500,000 or more, although the tax is expected to expire at the end of 2011. Connecticut’s top income-tax rate has crept up to 6.5% from 4.5% in 2002, while Oregon raised the top tax rate to 11% from 9% for filers with income of more than $500,000.

As they’ve grown, the incomes of the wealthy have become more unstable. Between 2007 and 2008, the incomes of the top-earning 1% fell 16%, compared to a decline of 4% for U.S. earners as a whole, according to the IRS. Because today’s highest salaries are usually linked to financial markets—through stock-based pay or investments—they are more prone to sudden shocks.
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This is what happens when you squeeze wage earners and spend beyond their means to fill the coffers of the government.
The Left’s idea of soaking the rich to pay for everyone else has hit an economic snag. When they run out of high income people, guess where the tax increases will happen next. Wealthy investors and business owners help drive the economy. They keep the wheels turning by creating jobs and hiring people. Tax them to death and force them out of business, and you end up with a financial abyss like the one in California.

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