The United States income tax structure is starting to look like the California income tax structure and that is not a good thing. California should be a lesson for federal tax planners. Relying more and more on the “rich” to carry the tax burden subjects the treasury to wild swings in revenue. That is something we experienced too often in the Golden State, as the economy goes through ups and downs.
There is also a question of fairness in who pays the bills for government services. Everyone should pay something to provide for government. People should not be dropped completely off the tax rolls, nor should there be loopholes for the wealthy taxpayers to escape all tax obligations.
On this tax day, state officials will be hoping for a rush of income tax returns to help pull California out of its deficit hole. But when approximately 144,000 income tax filers pay 50% of the state income tax, the tax structure is built on a rickety foundation.
The lure of no-personal-income tax states such as Nevada, Texas and Florida have drawn wealthy Californians away and punched holes in the state budget funding. As the Wall Street Journal noted last September, “California’s steeply progressive tax rates are defeating the purposes of progressive government. To wit, only a growing economy can create opportunity for the middle class and enough state revenues to finance schools and health care for the poor. A tax code that depends on 1% of taxpayers, 144,000 filers, to finance 50% of state income tax revenues has proven to be unsustainable, notwithstanding the liberal dogma that says tax rates don’t matter.”
Now the U.S. is traveling the same path.
With the “rich” projected to pick up more of the federal tax burden under President Obama’s plans and the Bush tax cuts scheduled to sunset, the federal treasury will rely more and more on a smaller group of taxpayers. It is now projected that by 2011, 46% of American taxpayers will have no income tax liability. As of now, the top 5% of federal income taxpayers fork over 60% of all income taxes and that latter number is bound to grow under current projections.
The federal government is not immune from taxpayers moving for a better tax situation. While perhaps not as easy as having the movers run across the state line to Incline Village, Nevada, the wealthy can and do pick up and move. Admittedly anecdotal, I listened to an earnest conversation between wealthy individuals not so long ago who had already explored purchasing property in New Zealand for a potential move out of the country.
People do vote with their feet and tax rates do matter.
The answer for both the state and federal tax reform is to create a flatter income tax that spreads the burden and eliminates loopholes so all will be part of the system and pay a fair share.