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Robert Frank, in WSJ, Tells Story of Taxing the Rich All the Way to State Bankruptcy

By Joseph McDaniel, Esq.

Robert Frank has written a remarkable article in the Wall Street Journal. 

He points out that a state like California, which has a strongly progressive tax rate, received almost half its tax revenues from the top 1% of earners in that lovely state.

Why?

Well, because they had the money, and it seemed like a good idea at the time.

And nobody expects the Spanish Inquisition, and nobody expects a Depression, either.

Turns out that during a Depression, the top 1% of money earners take a bigger and more brutal hit than ordinary Joes. By the way, I've never been fond of that term.

But what happens when a state is funded to a very large extent by people making a lot of money, and those people stop making a lot of money?

Yeah, that's right.

Here's what surprised me about the article: I didn't realize that folks in the top 1% of income earners in the population had such volatile situations.

But it makes sense; when economic conditions worsen, a business owner may decide to let the expensive employees go. And a small business owner may make a lot of money during the good times, but it's hard to run a small business during a good time, and when times are bad, it's much harder.

Long story short: states with flat taxes have less volatile cash flow issues during hard economic times.

Secondary take-away lesson: the depression hits the Big Dogs and the Chihuahuas among us.

p.s. Do you suppose that any of the folks in the top tax bracket in California moved to states with lower state taxes, or no state taxes? Do you think that was bad, in the long run, for the California economy? Just sayin'!

Full post as published by Arizona Bankruptcy Attorney Blog on March 31, 2011 (boomark / email).