Taxing the rich: There are limits

The 2010 fiscal year for most states began July 1. Facing severe budget shortfalls, some states have used the new year to introduce higher income tax rates. In Delaware, for example, the highest tax rate went from 5.95% to 6.95% on earnings over $60,000. In Hawaii, the maximum tax rate jumps from 8.25% to 11% for earnings above $200,000. And in New Jersey, the tax on earnings above $500,000 jumps to 10.25%, up from 8.97%; for a new bracket above $1 million, the rate is 10.75%.

As you can see, most of the tax increases are limited to high earners, the same tactic President Obama has proposed to help pay for expanded health-care coverage and other government spending measures.

But as Mark Robyn points out in his post for Tax Policy, a blog for the non-partisan Tax Foundation, raising taxes on the wealthy doesn't always have the desired effect. As some states have discovered, high earners have the means to move. The well-off also can afford to hire smart accountants to lower their tax bill.

That's not to say that wealthy folks shouldn't be taxed at a higher marginal rate. But the strategy seems like a shortsighted way for the federal government to raise the funding needed to fix health care. Howard Gleckman makes the point in his post for the non-partisan Tax Policy Center's blog, TaxVox.

What's the alternative? Len Burman, director of TPC, offers one option in this May editorial in The Washington Times. In the meantime, Obama can witness firsthand just how well targeted tax hikes work: While higher state tax rates were introduced this month, the rates are retroactive to January 1, 2009.

How many calls do you think accountants are getting right now?