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Sunday, July 12, 2009

Killing the goose making the golden eggs.

As this ongoing economic meltdown continues to unfold in slow motion, economic "weak links" have become apparent. As the economy contracts along with the tax base which has supported various levels of governmental programs, one glaring problems has become apparent with the soak the rich approach of specific states, most notably New York and California.

The primary purpose a tax system is to provide revenue for supporting vital state functions. In and so far that other secondary functions can be accomplished, these should be pursued only if they do not compromise the primary purpose of revenue generation, either in the immediate or the long term. While it seemed "fair and just" to claim that those who have more resources should pay their "fair share" of taxes, two major challenges have arisen when this state of mind is taken to more than its logical conclusions.

First, there is no clear point where a fair share can be defined. This has resulted in a remarkable reliance on the far end of the income curve to support state activities. In the both New York and California, more than half of the respective state budgets are balanced on the backs of less than 150,000 people. This worked reasonably well when a robust economy created enough of the wealthy to support such a scheme. Unfortunately two problems undermined this approach. First, reliance on high income earners was accompanied by virtually eliminating tax paying responsibility on the middle and lower class of income earners. As California and New York have lost their gooses that produced golden eggs, they also have lost the political will to reimpose tax paying responsibility upon much of their populace. Soaking the rich may be a good way to garner tax income under a limited set of circumstances but it is not a good way to garner a steady and predictable source of tax income.

The federal government is following the lead of states like New York and California in pushing a soak the rich approach. As it stands, a smaller and smaller cadre of individuals is supporting a larger and larger share of the federal budget. It will become increasingly difficult for those in control of the Federal Government to play a political game hostile to those who generate income and create wealth while simultaneously beocmes more reliant upon them to fund the operation.

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