Today New York, Tomorrow America?

One of the things I’ve been warning about of late is the economic danger of putting an ever greater share of the tax burden on high producers while large percentages of the American people pay no income tax at all.

In New York state, they’ve relied very heavily on the financial sector to shoulder their tax burden, and now it’s starting going tragically awry,

But New York finds itself in a particularly perilous spot because of its increasingly heavy reliance on the financial sector as its tax base. This summer, Gov. Paterson offered a stark example of the challenges: The top 16 banks paid $173 million of state taxes in June 2007, but that number fell to just $5 million this past June. And the financial sector generates one in five state tax dollars today, up from just 3% of state tax revenue in 1980.

The state’s budget division now projects a 35% drop in capital-gains revenue and a 43% decrease in bonuses. That alone would translate into a year-over-year decline of $20.7 billion in income, much of it taxed at the top rate.

In New York City, meanwhile, Wall Street accounts for 5% of all jobs but could account for one in five job losses.

To his credit, New York’s governor seems to be taking a wise approach to the crisis,

“[T]he higher we tax even the wealthy, the more we lose population and the less job creation there is,” Gov. Paterson said in an interview Friday. “We’re pretty resigned to the fact that we’re going to have to do this with spending cuts.”

…New York’s governor blames the state’s current shortfall, in part, on its failure to better manage revenue during the years of soaring Wall Street profits. “What’s actually more embarrassing than the fact that we have such a huge deficit now, when bonuses are down and capital gains are down, is the fact that when there was…wealth, we overspent,” says Gov. Paterson.

That being said, there’s a very basic lesson here for people outside of New York State: don’t put all your eggs in one basket.

If we expect the top 5% of the population to shoulder the majority of the tax burden, eventually, the time is going to come when there’s a major tax revenue drop from that group. It may be because of the economy, people moving out of country, tax shelters, people cutting back on their work load or retiring rather than pay exorbitant tax rates, etc., etc., etc. — and let me tell you, it could hit us much, much harder than New York is being hit today.

In New York, “the financial sector generates one in five state tax dollars today,” but in the US, the top 25% of income producers already pay 86% of the federal income tax — and that number will certainly go up under Barack Obama. So, what happens if there is a major league tax revenue drop off from that group or worse yet, they reach a tipping point and the amount of revenue they pay starts to go into a long-term decline? The same thing that happens when you put all of your eggs in one basket and accidentally drop the whole thing on the sidewalk…splat!

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