First the Politicians Come After the Rich...

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Several years ago New Jersey attempted to solve its persistent budget problems with a tax increase on those making more than $500,000 a year. But since Jersey still has budget problems, Gov. Jon Corzine recently proposed targeting a new group for a major tax increase: households earning $150,000. In high-cost Jersey, where a construction worker married to a nurse might be a $150,000 a year household, about 15 percent of all families will see taxes rise under the governor’s new proposal to eliminate their property tax deductions. These folks already pay more than two-thirds of the state’s income taxes and that proportion is going up—maybe way up.

What’s happening in New Jersey is not unique. Just months after a presidential campaign in which Barack Obama argued that he intended to make the wealthy pay their ‘fair share’ of taxes, politicians across the country are scrambling to balance their budgets by focusing on higher-income earners. But in doing so they are also redefining downward who constitutes the wealthy. Upper-middle and even middle class taxpayers are finding out that when politicians say they are coming after the rich, they don’t really mean just the rich.

One reason this is happening is because politicians who campaign on a platform of taxing the wealthy are usually beholden to constituencies who won’t let them restrain the growth of government. So everyone, not just the rich, gets sucked into the budgetary vortex. In New York State, for instance, formerly liberal state senator David Paterson found out when he became governor that some of his oldest friends and former neighbors in Harlem had left the state because they “can't pay the taxes” anymore, as Paterson explained it. So naturally Paterson began this year’s budget negotiations adamantly opposed to proposals for a millionaires’ tax, claiming the problem was not that the rich weren’t paying their fair share, but that the state chronically overspends.

But Paterson’s own party in New York is so beholden to big-government groups that they just rolled over him. Earlier this week, New York announced tax and fee increases of $7 billion to support a budget that will grow by an astonishing 8.7 percent next year. Among the increases is a surcharge on those earning more than $200,000 a year—which is considerably less than a millionaires’ tax. Apparently, state policy makers realized that, with the financial sector shrinking rapidly in New York, there aren’t nearly enough millionaires left to finance the spending sprees that their supporters demand. So the once-resistant Paterson and legislative leaders simply redefined ‘millionaire” downward--way downward.

The increasingly common phrase “millionaires’ tax” that is now employed in budget debates is one of those slick political slogans, like “compassionate conservatism,” that sounds so good that hardly anyone could be against it, until you see what it actually means in practice. In 2004 California passed a millionaires’ tax whose rationale sounded so reasonable: Increase the burden moderately on the rich to finance more services for the mentally impaired. Who could object? Yet four years after the tax passed an audit found that only $726 million of the $3.2 billion in new funds had been allocated for mental health services. Most of the rest sat unused in bank accounts because the state’s mental health agencies haven’t figured out how to spend the money. Now California is again raising its income tax rates to help solve its current budget woes, giving the state the highest top tax rate in the country.

It’s difficult to find a millionaires’ tax that has accomplished what it was supposed to. New Jersey’s tax on those making $500,000 (bizarrely dubbed a millionaires’ tax by its proponents) was designed to finance property tax rebates for everyone else in the state. Advocates of the levy even called it a ‘fair share’ tax, implying that somehow the rich weren’t paying theirs. Since the tax passed, the state’s budget has been in a free-fall and the property tax rebate program financed by the half-millionaires’ tax has now been suspended for every household earning less than $75,000 annually. Still, the state is once again raising its half-millionaires’ tax to help finance its current deficit.

More such taxes are certainly on the way. Maryland instituted a millionaires’ tax in 2008 and still continues grappling with among the steepest budget deficits in the nation. The Democrats who control Minnesota’s state legislature have introduced their own version of a millionaires’ tax, but some members of the legislature want the tax to apply to everyone earning $250,000 or more. That’s not a good sign, if the debate on your millionaires’ tax starts out at one-fourth that number.

But as politicians define wealth downward the collateral damage grows. New York’s public sector unions put a lot of resources behind the campaign to raise taxes on the wealthy—advocating tax increases starting at $250,000 per family in annual income. That provoked a rebuke from some union members who noted irately that two public school teachers married to one another can earn that much money in New York these days. Previously, no one in New York seemed to consider that taxing the rich meant taxing public school teachers. Politicians, everyone assumed, were just gunning for those bonus babies at AIG. Now, instead, a lot of people are going to be very surprised.

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