An article was written for the March 26, 2011, Wall Street Journal exposing a noted problem with taxing the rich. The article can be found be clicking: http://online.wsj.com/article/SB10001424052748704604704576220491592684626.html Robert Frank, who wrote it, compares states by the amount of tax income received by their top earners, the mega-rich. It is a very interesting article and I suggest reading it.
The issue is that, apparently, the incomes of the mega-rich are also the most volatile in the country, so a state that gets a large percentage of its income from taxing them, will suffer a lot more in a recession when those incomes are decreased more than income earners that are closer to the average. I totally agree. California and New York are really hurting, and it's mostly because the guys that pull in 10 or 20 million dollars per year on average only pulled in 2 or 3 million in the most recent couple of years. Don't ya feel bad for them? It's like an 80% drop in income. How do they live?
Anyway, my big disagreement with the article is the proposed solution. The solution, apparently is to lower their taxes, and raise the taxes of the guys that are making 30,000 to 100,000. This would make a state's tax income less susceptible to recession swings.
I think there's something morally wrong with lowering taxes on the millions a year guy and raising them on the thousands a year guy, just to keep state tax revenues steady.
How about this. It'll be insanely hard. The most hard thing a politician can do, probably... Save money. I would say leave the tax rates where they are, put a spending cap in place, compute a rolling 10 year average of tax incomes from the richest 1%. Whatever that average is, any income above it from a given year gets put into a rainy day fund for any year when the income from this group is below average.
Here's another insanely difficult thing for a state to do. After a few boom years, when this fund starts getting big enough to cover some bust years, start investing any extra money. States could actually start getting money from investments, and then they wouldn't need as much in taxes years down the road. Lots of foreign countries do this, including communist countries and oil rich tyrant countries. A state could invest in companies, currencies, etc.
Another unthinkable thing to do would be for the federal government to do it. Instead of our federal government paying other nations that underwrite our increasing debt, how about we get out of debt, and start investing our money? Some say I'm a dreamer, but I'm not the only one.