FUSION JANUARY/FEBRUARY 2010
| The $787 billion “stimulus” program may have created little to no jobs in the U.S., but Democrats have found a surefire way to provide a boon to the Swiss and Grand Cayman banking industry: A millionaire’s tax. |
With the federal budget deficit this year exceeding a record $1.4 trillion, fleecing the rich is now being touted as the way to bankroll Obamanomics. The latest health care bill to be passed by the House of Representatives, for instance, contains a punitive surtax for individuals making more than $500,000 or couples making more than $1million a year.
The “wealthy” have long been an easy political target so, this is really no surprise. Besides, it’s not a bad deal, right? I mean, the rich have plenty of money, so why not make them cough up a little more?
The reality is that these schemes never produce their intended results. Instead of filling government coffers to benefit the public good, these punitive taxes always end up bringing in less revenue than expected. Why? Because the rich stash their money off-shore, move to more tax-friendly locales or simply decide to work and invest less because of the tax consequences.
Kail Padgitt, an economist at the non-partisan Tax Foundation says, “Millionaires’ taxes are not reliable revenue sources. These might provide revenue in the short run, but the long-run costs make it a terrible bargain.”
This is not just a federal phenomenon. This year, Hawaii became the fifth state to implement a so called “millionaires’ tax” (the other four: California, Maryland, New Jersey and New York). In each of these states, unintended consequences abound.
Last year, cash strapped Maryland implemented a millionaires’ tax with depressing results: Revenue from that tax bracket was down $100 million and one-third of the people in that bracket were no longer there.
New Jersey produced similar results. Because of the implementation of a half-millionaire tax in 2004, the number of families making over $500,000 grew by 16 percent less than the national average between 2003 and 2006.
In California and New York, it’s hard to tease out the effects of high-income taxes from other bad fiscal policy. Over the last decade, the two states have seen, on net, 1.4 million and 1.9 million people (respectively) move out.
In California, the state’s highly progressive tax structure drove both rich and poor away. According to the Public Policy Institute of California, in the top quintile, 1.16 per every 100 households left between 2004 and 2007. In the bottom quintile it was 1.73—surely due to many employers (likely in the top quintile) departing. And where did they go? Three of the top destination states were Nevada, Texas and Washington, none of which have an income tax.
In the case of New York, it is losing many of its wealthy investment bankers to tax-friendly Connecticut, just across the border. In the words of public policy expert George Gilder, “High tax rates do not redistribute income, they redistribute people.”
Even the Beatles—certainly no Reaganite conservatives—were tax refugees. Their song “Tax Man” was about England’s terrible tax burden. They were paying 95 percent of their income to the crown (“There’s one for you, nineteen for me”). So what did they do? They moved to the then low-tax United States, of course.
Now let’s suppose you don’t believe that these taxes will have adverse consequences and are a good idea on the grounds of economic justice. After all, during his campaign, Barack Obama said that he would look at raising taxes “for purposes of fairness.”
Well, chances are that you don’t make over $1 million a year—no hard feelings, only .3 percent of Americans do. However, “millionaires’ tax” has become a catch-all term, usually referring to any tax on income over $250,000. Over the summer, House Speaker Nancy Pelosi explained why her colleagues’ newly proposed tax would fly politically: “You hear ‘$500,000 a year,’ you think, ‘My God, that’s not me.’”
Pelosi and company see such measures as reasonable because they appeal to people’s sense of fairness or, possibly, envy: The rich earn so much more income so they should pay more in taxes. The problem with that logic is that they already do. The Internal Revenue Service’s most recent data shows that the top 1 percent paid 40 percent of all income taxes in 2007, more than the entire bottom 95 percent.
Last April, in conjunction with tax day, a Gallup poll asked, “Do you consider the amount of federal income tax you have to pay as too high, about right, or too low?” Forty-six percent of respondents answered, “about right”—the highest since 1956. This might be surprising until you learn that the poorest 40 percent of Americans now pay a negative income tax rate.
The people who make up these elusive top tax brackets are not all Paris Hiltons and Derek Jeters. It’s estimated that roughly half of America’s small-business income would be hit by Obama’s plan to raise the top two tax rates. This couldn’t come at a worse time. As Dr. Padgitt explains, “As the economy begins to recover, we need a tax system that attracts investment. Millionaires’ taxes provide the exact opposite.”