James Surowiecki recently made the case for a more progressive tax code, featuring a larger number of brackets designed to impose higher marginal tax rates on those making more than, say, $1 million or $5 million a year, and so on. Rather depressingly, a central part of Surowiecki’s case is that more brackets would fragment the upper class into a “lower upper class” of affluent professionals that resents the “upper upper class,” thus making the culturally influential lower upper class “a powerful force for reforming the way we deal with inequality.” Given how powerfully the populism of Al Gore and Howard Dean resonated with upper-middle-class voters, I’m guessing Surowiecki is right.

But leaving the politics aside, Surowiecki’s proposal strikes me as unwise. Much depends, of course, on what kind of a hike we have in mind. Factoring in new taxes under PPACA and the expiration of the Bush tax cuts, we’re already increasing marginal rates on top earners, and that’s leaving aside the state and local tax burden in the regions where high earners tend to concentrate. Like Megan McArdle, I think we’re reaching a danger zone for work incentives when the government at all levels starts taking more than half.

Another issue, arguably more important, is revenue volatility. As Josh Barro of the Manhattan Institute notes in his latest RealClearMarkets column, the federal government can borrow to hedge against revenue volatility. Yet I think his arguments on highly progressive taxes at the state level nevertheless have resonance for the national scene:

Personal income tax receipts have also been far more volatile than GDP — off by 14% over the last two years. This is partly because of progressivity — high-income people have incomes that move more with the economy, and they are taxed at a higher rate. And it’s also partly because interest, dividends and capital gains — which are not components of GDP — have been hit hard in the recession.
While most income tax on labor income is collected through withholding, tax on investment income and self-employment income is largely remitted as quarterly estimated tax payments. For the 2009 tax year, these payments to state governments were off 26.8% from 2008, reflecting extreme weakness in investment income. The bleeding hasn’t stopped — even as the economy grows, April 2010 estimated tax payments were off 10% from April 2009.

To that end, I wish that we could rely more heavily, as Josh suggests, on property taxes. On a tangential note, Josh’s column includes this extraordinary fact:

This would be an especially good idea in southern and western states with low baseline property taxes — like California, whose biggest challenge is not high taxes per capita but extremely high income and sales tax rates. If California raised property taxes to a level typical in the northeast, it could repeal its state and local sales taxes entirely without revenue loss, and the state’s budget swings would be less severe.

FYI, California’s state sales tax in 8.25 percent, and it is 9.75 percent in the city of Los Angeles.