Recently my assistant came into my office perplexed by a report she had just heard. She asked if it were true that people were really going to be taxed at a rate of 60%. Because of the health care proposal at the time, the combined federal and state tax rates in certain states would approach 60%, with the average rate per state over 52%. My assistant asserted she could not believe this could happen in America.

While my assistant is not a rich woman and she is a Democrat, she still understands the inherent unfairness of this public policy. She could not believe that we would take more than half of someone’s earnings. She was not aware that federal tax rates were once 90% until President Kennedy reduced them to 70%, which was then lowered by President Reagan to 50%. These were periods where the rates were high, but the offsetting deductions substantially diminished income levels making the effective rates much lower. President Reagan ended all this nonsense with the tax reform of 1986, which rewrote the tax code to bring the top federal rate down to 28% and eliminated all but a few deductions.

Since then governments have been raising top rates with the argument being made that the “rich” are not paying their fair share. The tax policies we are following are doomed to failure, and yet the Democrats in Congress persist in this folly because of Obama’s silly and impossible pledge not to raise taxes on people earning less than $250,000. The Democrats in Washington should learn a lesson from their counterparts in California and New York.

California has established an independent commission to analyze the state’s tax revenues sources. It turns out that 144,000 residents contribute half of all personal income taxes. Even Karen Bass, the current Speaker of the Assembly and someone dumb as a stone about economics, has concluded that 38 million people cannot be dependent on such a small tax base. New York City was crushed with the downturn in the stock market because 50% of their income tax revenue came from people working on Wall Street. Establishing your tax base on such a small portion of the population is a recipe for havoc.

50% of working Americans pay no federal income taxes. They pay into Social Security and Medicare, but those are benefit programs. When that many people do not have a stake in the tax system, there is opportunity to manipulate elections by appealing to their interest of taxing “the other guy”. Obama did exactly that when he said he would only tax those people with lots of income, but not you, so vote for me.

The realization that tax revenues cannot hinge on a slim tax base has begun to seep into the public policy debate. States are particularly vulnerable because while high-income residents may not wish to leave their country they will move their family and business between states. California has already lost significant numbers of high earners to Nevada where there is no income tax. The reaction of the California Legislature has been to continually raise tax rates, thus encouraging additional residents to depart. Two years ago in Maryland, they raised taxes on the highest earners and a third of them have relocated since that time. Continued...