The Rich Really Are Different: Their Incomes Fluctuate More

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Robert Frank points out that a lot of the reason states are in so much trouble is that many have become incredibly dependent on high earners for their tax revenues:

Nearly half of California's income taxes before the recession came from the top 1% of earners: households that took in more than $490,000 a year. High earners, it turns out, have especially volatile incomes--their earnings fell by more than twice as much as the rest of the population's during the recession. When they crashed, they took California's finances down with them.

Mr. Williams, a former economic forecaster for the state, spent more than a decade warning state leaders about California's over-dependence on the rich. "We created a revenue cliff," he said. "We built a large part of our government on the state's most unstable income group."

New York, New Jersey, Connecticut and Illinois--states that are the most heavily reliant on the taxes of the wealthy--are now among those with the biggest budget holes. A large population of rich residents was a blessing during the boom, showering states with billions in tax revenue. But it became a curse as their incomes collapsed with financial markets.

This is one of the reasons that we can't fix all our budget problems with higher taxes on the rich--if we do that, revenues are going to collapse dangerously every time there's a recession.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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