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Tuesday, January 17th 2006

Relying On The Super Rich

I don’t like the idea that the super rich owe something more than others. I don’t even understand how the proposition is defensible.

But off my ideological thought block for a moment, there are other reasons why taxing the super rich too much is a bad idea.

Here however is a novel pragmatic argument being made that relying on the rich for too much of your tax revenue provides inadequate diversity and opens yourself up for disaster. Just take the state of California where the top 5% of earners represented almost 60% of tax revenues.

The personal income tax represented $33.7B of the $73.6B in revenues in the 03 budget, high income filers represented 58.8% of 45.8% of the budget, or 26.9% of the annual budget.

Since this represents 680,000 returns of the 13.6 million filed, it’s fair to say that half a million households provide about a quarter of the revenue to the state.

I think this is an amazingly bad idea. I don’t think that this is a bad idea because it’s unfair to the half-million rich households. I think it’s a bad idea because it builds insane levels of volatility into the state revenue stream.

There’s numbers on the site to prove it.

On the federal level the top 5% account for 38.4% of all federal tax revenue (not just income tax). Personal taxes account for almost exactly 80% of all federal revenue! 80%!

The United States government borrows and overspends obviously. But of the revenue they do bring in, around 2.2 trillion dollars, personal payments from the top 5% account for about 31%. This doesn’t even include corporate taxes, many of which the top 5% of earners are likely to have vested interests in.

Nearly a third of revenue comes directly from the earnings of the super wealthy. The question is, do recessions, in terms of percentage change in income, not absolute dollars, hurt these individuals more than other classes?

Are the income sources of these individuals diverse enough for this reliance on them by the federal government not to be an unnecessary risk?