I have a schizophrenic view of taxation: On the one hand governments need money to provide services that the private sector cannot or should not provide so taxes are inevitable and necessary. On the other hand governments take our money and spend it on things we don’t agree with or can’t see the direct benefits of so taxes are excessive and arbitrary. However, as a drunk and disorderly self-educated economist what really concerns me about taxes is the people who pay them. More specifically, the risk inherent in the ever decreasing number of people who actually pay income taxes.
In 2008 46% of all US Federal Government receipts were from income taxes. If you take out the 40% of receipts used for ‘Social Insurance’ (Social Security, Medicaid, and Medicare) that the government saves for future expenditures (ah, that’s a good one!) then income tax accounts for 76% of total direct federal taxes.
In 2008 the top fifth of income earners paid 69% of those federal income taxes and the top two fifths (40% of all people who filed income tax returns) paid 87% of all federal income taxes. If I’m understanding my timses and gozintas right, less than half of all income tax payers get the bill for about half of all government receipts (76% if we want to be honest).
Where you sit on the financial food chain may make you smile or cringe at these numbers but let’s not go there. Instead, let’s think about how risky this is. If California is the beta site for American culture get ready for a disturbing phenomena; Tax payers who leave. George Will of the Washington Post provides this eye opener from a column on eBay ex-CEO Meg Whitman who’s running for California's Republican gubernatorial nomination “Twenty-five percent of California's revenue comes from income taxes paid by the 144,000 richest taxpayers, so ‘if one of them leaves, it's a really bad thing’."
California’s highly progressive state income tax ranges from 0% to 9.3%. The top 5% of the Golden States income earners pay 47% of all the state's income taxes. If I live in Cali I don’t mind if Brad and Angelina or Tom and Katie are getting soaked (I’m not sure if these people are California residents but they make better examples than Gary Coleman or Robert Blake). But I do mind if they move out of state. Yes, just one of them. If TomKat is raking in $20 million a year, that’s a $1.86 million revenue hit if they find a delightful place out of state with a Church of Scientology around the corner.
Putting aside class warfare and politics, depending on an elite few for a majority of your revenue is dumb. It becomes scary dumb when those few meal tickets are part of a global virtual economy and can easily work from Dubai, the back of their Gulfstream G650, or Nevada.
The Obama economic team, as well as any state or municipality, should consider this risk when setting tax and budget policies. None of them will but it never hurts to point this stuff out.