One problem with covering deficits by singling out the rich for tax increases is that there are not enough of them. So says Governing magazine–hardly an outlet of the so-called “1 percent.”
The magazine, in its December 2011 issue, also says “The more progressive the income tax rates, the greater the volatility is going to be.” That’s one reason, I argue, why depending on the income tax, especially “soaking the rich,” is an unwise policy. The magazine cites this volatility as one reason for the recent budget deficits of California (top rate: 10.3 percent) and New York (top rate: 8.97, introduced on January 1, 2009).
While raising the taxes (only) on high-income earners is “a relatively palatable idea politically,” says Governing, “there aren’t enough wealthy people around to make up most deficits through a 2 or 3 percentage point hike on a limited pool of individuals.”
The Star-Tribune, meanwhile, says that increasing tax rates on a few people is the centerpiece of Gov. Dayton’s legislative agenda … for 2013. The governor is correct in saying that the state needs to get away from “one-time gimmicks like school shifts and tobacco borrowing.” But, to borrow from the article from Governing, the solution is not “a more progressive state income tax.” A far better path would be to some reforms to state government (also mentioned in the Strib) that would lower the cost of government.
Update: MinnPost notes this commentary, but says that “Mr. LaPlante excludes a bit of the nuance of the article.” Well yes, I did. The fundamental point of the article is that people who expect “soak the rich” tax increases to adequately address budget deficits will be disappointed. The fact that estimates aren’t always right is a minor point. After all, you might say that another name for an estimate is a “scientific guess.” Are estimates more likely to be wrong in a recession? I don’t know. But the problem addressed in the article is more than a measurement error. As the Kellogg School of Management at Northwestern University points out, “those who experienced the greatest shock to their incomes [during the recession] were likely the top 1 percent of earners.” Legislators, overload your expectations on them at your peril.