August 10, 2010 | Commentary on Taxes
Imagine you are one of House Speaker Nancy Pelosi’s top political strategists. The polls show your party needs a game-changer, something that will transform what looks like a losing political hand into a winner. “I know,” you shout, “let’s push for a large tax increase on the ‘fortunate few’ — the 2 or 3 percent of the population with so much money they won’t even miss a few thousand bucks. The other 97 or 98 percent will feel no pain, and we’ll be able to call ourselves deficit hawks when all those billions start rolling in.”
On paper, this strategy may look promising. But a close look at who will pay the tab, where they live, and who represents them on Capitol Hill suggests that this approach has some major political flaws.
First, a few facts. When the Times Square ball falls on New Year’s Eve, the top tax rate on wages will jump by more than 13 percent, to 39.6 percent; the capital-gains tax will leap by a third, to 20 percent; and the tax on dividends will more than double, leaping to 39.6 percent from 15 percent.
Other taxes are slated to rise, too. Tens of millions of middle-income families will not only see their own marginal tax rates increase, but will also see the tax credits they claim for their children cut in half, their marriage-penalty relief vanish, and the current 10 percent tax bracket on the first $12,000 of their income increase to 15 percent.
In sum, tax-hike Armageddon looms, and the political lines are clearly drawn. Every single Republican lawmaker in Congress has called for stopping these hikes. But many leading Democrats — such as Treasury secretary Timothy Geithner, Speaker Pelosi, and Senate majority leader Harry Reid — see things differently. While they insist they won’t let taxes rise on the middle class, they believe it is only “appropriate” to boost taxes significantly for the wealthiest 2 to 3 percent of Americans. It is, they insist, the best way to reduce the burgeoning federal budget deficit.
Their plan is straightforward: Soak only the top-earning households in America — those earning more than $200,000 as single filers or $250,000 as married couples. Economically, they argue, it’s a free lunch. Pelosi summed up the progressive macroeconomic view this way: “The Bush tax cuts for the wealthiest people in America did nothing to grow the economy during the Bush administration, did not create jobs, [and] did not reduce the deficit.” And House majority leader Steny Hoyer articulated the microeconomic rationale: “Those who are doing well will not have their lives adversely affected [by these tax increases].”
Not only do they see no economic harm in squeezing an extra $75 billion or so each year from our most productive citizens, but Democratic political strategists also see this soak-the-rich strategy as a political winner. Lori Montgomery of the Washington Post explains:
Raising taxes is usually a perilous move. But Democrats, facing the potential loss of their majorities on Capitol Hill, believe that the [tax increase] strategy will both force Republicans to defend tax breaks for a tiny, wealthy minority and expose GOP hypocrisy on budget deficits.
So there you have it. Divide that “tiny, wealthy minority” from the rest of us. Pit those idle rich against the hoi polloi. Let “the little people” keep their tax credits and their pathetic 10 percent tax bracket, and they will reward you at the polls for sticking it to those haughty country-club types.
What’s not to like about that road to political victory in November?
Well, a couple of things. According to the most recent IRS income-tax data, that “tiny, wealthy minority” encompasses more than 4.3 million households. Counting spouses, children, and other dependents, you’re talking about putting 12.5 million living, breathing Americans in the tax-hike crosshairs.
That’s an average of nearly 29,000 “rich” constituents per district — no small potatoes in an era when lawmakers break out in night sweats whenever district offices report that disgruntled voters are asking when they will hold town-hall meetings.
Of course, no district is “average.” The number of “rich” households varies dramatically from one district to the next. No fewer than 100 House districts boast at least 40,000 “rich” constituents (for the full list, go here); 68 districts are home to 50,000 or more; and 25 districts have 75,000 or more. One of those 25 is VA-11, located in the D.C. suburbs. Its current representative, Democrat Gerry Connolly, acknowledges that constituents have been lighting up his phone lines. As a result, he has been making the rounds on cable news and saying that now is not the time to raise taxes on anyone, including the rich.
Connolly is no supply-sider; his concern is a prudential one. While tax increases on the wealthy may one day be appropriate and necessary, he argues, the “fragile” nature of our economic recovery precludes such a move forthe time being. He’s on stronger ground when he points out that the top 5 percent of income earners generate 30 percent of all economic activity; hitting them with a draconian tax hike would surely throttle the recovery.
According to the latest IRS income-tax data, Connolly’s district ranks among the 20 wealthiest in the nation. Counting spouses and kids, fully 84,804 of his constituents live in “rich” households. That’s over 11 percent of his constituency.
Several of Connolly’s Democratic colleagues find themselves in a similar bind. Topping the list is freshman Rep. Jim Himes in CT-4. More than 146,000 of his constituents — who comprise over a fifth of his district’s entire population — live in high-income households that will be asked to fork over an astonishing $1.7 billion in additional taxes next year. That’s more than $39,000 per household.
When we consider how many other competitive House districts have significant numbers of “rich” constituents, it becomes clear that the politics of “taxing the rich” may turn out to be more complex than Democratic strategists first envisioned. Indeed, the progressives’ class-warfare gambit may backfire disastrously this November.
Michael G. Franc is vice president of government relations for the Heritage Foundation.
First appeared in National Review Online