Socialism has never worked. Period. After the 1929 stock market crash, Hoover raised taxes on the wealthy and signed protectionist legislation into law. It didn’t work. Roosevelt arrived into office promising hope and change, and raised taxes even further.
To be sure, Roosevelt’s new taxes on the rich were intended to raise revenue. But they were also designed to make possible a range of less visible taxes on everyone else. Steeply progressive income and estate taxes made possible the regressive financing mechanism for Social Security. They also provided political cover for the vastly expanded income tax that emerged from World War II. Both of these elements of the postwar tax regime owe their longevity to Roosevelt’s soak-the-rich tax policies of the 1930s. Only by taxing the rich could FDR build a government that would help (and tax) the poor and middle class.
As we all know, America’s economy stayed in a Depression until World War II. So much for soaking the rich to pay off debts.
How about modern day examples? One need go no further than the luxury tax that the first Bush administration enacted in 1990. The idea was to make the rich pay their “fair share” by taxing luxury items, like yachts. However, Congress, in their hasty greed, forgot that luxury industries employ a lot of average Americans and that, if American luxuries were taxed, the wealthy just might elsewhere to buy their expensive baubles.
And if members of Congress never considered that the luxury tax would discourage rich people from buying luxury items in the U.S., then they surely never considered that such an effect might not be so good for the Joe Six-Packs who worked in the industries producing luxury items. A Joint Economic Committee study later found that 330 jobs in the jewelry industry and 7,600 jobs in the yacht industry were lost thanks to the luxury tax. Perhaps the greatest irony was that in 1991 the federal government paid out over $7 million more in unemployment benefits to those workers than it collected in luxury tax revenues.
Last year, the state of Maryland decided to balance its budget by increasing the tax burden on the rich. How did that work out? Not very well.
Here’s a two-minute drill in soak-the-rich economics:
Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”
One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.
No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey (see here).
The Maryland state revenue office says it’s “way too early” to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave.
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