The WSJ on Tax Rates

In an interesting article in the Saturday WSJ covered the perils of progressive tax systems.   Over the last two decades, in the name of increasing progressivity (or "fairness") in the tax system they have moved up rates for the very rich.   That has done two things.  First, the percentage of taxes paid by the top bracket has increased (while the lowest bracket's shares have decreased).   In California, for example, the top 1% pay 45% of the total income tax receipts.   That means that 1% of the taxpayers in the state offer up about 20% of the total tax receipts in the state.   In the last 30 years (since I finished a dissertation on the subject) the state's reliance on personal income taxes has increased so they now account for 43.9% of total taxes.

The second problem is a result of the first.  Volatility of incomes increases as you go up the income scale.  Thus, when the highest earners are in good shape they provide lots of money; but when their fortunes decline, so do tax receipts.   During the first decade of this century California's income tax receipts took huge swings.   That was partially a result of the booms and busts in Silicon Valley.   There is a related issue on this also - the highest income tax payers also have the greatest ability to migrate.  California has about 13 million taxpayers.   That means our fate is decided by fewer than 130,000 taxpayers.   According to the Franchise Tax Board's most recent tax statistics the number of returns claiming more than $1 million in income amount to just 42,500; even if you add in all incomes over $500,000 the number jumps to just 118,000.