No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions.The Wall Street Journal editorial page can't really believe this, can it? I'd say there is widespread consensus that the exact opposite of what the Journal says here is true: Progressive taxes are useful in recessions precisely because of all that vanishing revenue.
That's because a progressive income tax is an automatic stabilizer: It helps offset shocks to GDP that come from large declines in income and wealth. When a family's income falls during a recession, the percentage of income paid to the government falls at a faster rate -- since, under a progressive income tax, you can only fall into a lower bracket. Household demand will thus be higher than it would be under, say, a flat tax ("everyone pays 20%") or a head tax ("everyone pays $2000").
It is also true, as the Journal says, that there will be a decline in revenue. That's the inevitable price of offsetting the shock. But that's really no different from a deficit-financed tax cut, or one of the other policy initiatives that I'm sure the Wall Street Journal editorial page will get back to supporting once it's done making disingenuous arguments against progressive taxation.
The lingering problem with a progressive tax system is that it creates an overdependence for revenue on a small number of people. In 2007 (according to IRS information) the top 0.1% of taxpayers contributed 17.4% of the total amount of tax revenue. The top 1% contributed 36% of the total amount of tax revenue.
Let's look at one part of this top 0.1% (one out of a thousand)being hedge fund and private equity shops. This group is not fixed to specific location to make and keep their revenue (IOW: Don't need to punch a clock at a factory); best advised of their options; realize that they can reproduce their current business and personal lifestyle in many locations; and tend to be more likely to think "out of the box".
In addition, while many of them were previously content to pay the tax required of them to live in places like NYC, the world changed in the last year. They have significantly fewer assets under management. They are also getting pushback from clients on the "normal 2 and 20" fee structure. Even though their gross revenue is now reduced, the tax burden has increased tremendously. In 2008, they lost the "carried interest" strategy. Now they are looking at all this revenue being taxed at income tax rather than capital gains rates. Finally, they are also staring at increased rates from President Obama, Governor Patterson, and Mayor Bloomberg as each tries to fill the giant gaping tax revenue hole that is opening up this year.
The question for the U.S. government is what will happen to their total tax revenue if the hedgies decide not just to move from NYC to Stamford, but actually leave the U.S. entirely. If even a small number of these taxpayers leave, it will have an asymetric impact on total tax revenue.
The government has too possible choices.
The first choice is to try to throw up barriers to departure. This will have one of two results. Either people considering departing will give up the thought as it is now too expensive OR people will rush to the exits before the price gets even higher.
The second choice is to make the system more attractive to pursuade them to stay. Let's just say that there is not much political mileage these days in doing anything to help hedge fund and private equity managers.
The result is that advisors like me are seeing a huge spike in the number of these people who are heading for the exits and the press is missing the story of what it will be like when they are gone. Like many things, the general public will only appreciate their prior contribution when it is gone.
Sounds true and felicitous to me (i.e. that "a progressive income tax is an automatic stabilizer").
The author is confusing two differnt concepts. Progressivity in income tax rates is broadly supported, even among many conservatives. The contention is generally around the level of marginal rates and the steepness of the tax rate curve. One can be against high marginal rates and still be in support of a progressive tax system. Even most "flat tax" proposals generally give a income expemption for the first $x thousand of income -- making it a progressive system.
The fact that a progressive system can be a stabilizer is true only if the government responds responsibly to the decline in revenues. History has shown the opposite to be true -- states with highly progressive systems (and therefore, highly volatile streams of revenue) have based levels of spending on the good times when revenue is strong, and then raised taxes when revenues slumped during a recession. Its a viscious cycle that only assures the recovery will be weaker than otherwise, as California can attest to.
And to continue your point, Conor seems to be misrepresenting the WSJ a little. The article doesn't make an argument against progressive taxes directly, but against Maryland deciding last year, at the beginning of a recession, to significantly increase the taxes on the millionaires. Thus, as millionaires lose money, they continue paying a high rate of their income.