One of the practical problems with the boilerplate “tax the rich” strategy is that the rich are not stupid. When taxes in one state rise to an unacceptable level, they move to another where the tax rate is more to their liking. The new state gets a big infusion of tax revenues and the progressives in the high-tax state sit scratching their heads because their tax base has mysteriously disappeared.
Witness my home state of Maryland.
We reported in May that after passing a millionaire surtax nearly one-third of Maryland’s millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they’d collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn’t fled the state.
Well, the state comptroller’s office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million…
And it gets worse. Maryland lost one in eight millionaires from 2007 to 2008 and approximately $1 billion of its net tax base because people fled Maryland to more hospitable places. Montgomery County, one of the state’s wealthiest, got clobbered. It lost over $4.5 billion dollars in taxable income between 2007 and 2008 and the number of returns over a million dollars plummeted by 27 percent.
Have the progressives running my state learned anything? Of course not. According to the WSJ, the Democrats are pushing two bills to extend the tax hikes past their 2010 expiration date. They’re getting the usual distortions from union-backed groups like Citizens for Tax Justice and Maryland Democrats still believe that this tax will raise revenue, despite direct evidence to the contrary.
No, the rich aren’t stupid, but some days I wonder about progressives.
You wonder about the intelligence of progressives? I don't - there's plenty of data and experience to remove all doubt. They're "stuck on stupid" !
This post has been linked for the HOT5 Daily 3/15/2010, at The Unreligious Right
Hi,
Tell me more about the "distortions" from Citizens for Tax Justice. What exactly are we distorting? Very interested to know. Thanks!
Two points.
First, as the WSJ noted, there is evidence that millionaires are fleeing the state. While it is true that many millionaires had their incomes reduced by the recession, it is also true that a significant percentage (1 in 8, according to the WSJ story) simply left.
Second, the CTJ claims that "low-income families still pay more of their income in Maryland taxes than millionaires must pay", which is an imprecise statement. If the claim is that low-income families pay a larger percentage of their income in taxes, then say so. As the CTJ has it, it appears that low-income families are actually footing more of the overall tax burden than millionaires, which is not anywhere close to true.
Regardless, the issue of whether the rich pay a greater percentage of their income than the poor is of no importance at all in a discussion of how the State of Maryland can solve its runaway spending problems. If the CTJ wants to find creative ways of raising revenue, then it should make those suggestions instead of pursuing social justice aims that may or may not solve the real and pressing fiscal problems of the state. Pushing a political matter as a fiscal solution is also a deception.
The CTJ is more than welcome to pursue its goals of evening out everyone's level of wealth, but not by cloaking them as a means of fixing a very real government spending problem.
The one point the CTJ did not address is how a program that was supposed to raise $106 million more in taxes instead fell short of the pre-tax total by over $200 million. Given that the tax base, due to the recession and attrition, has shrunk markedly, why should we believe that the program will succeed wildly this time?
On substantive point #1, the "story" all along with this has been that folks like the WSJ are taking this data out of context. When you say that "a significant percentage…simply left," that is every bit as true as the WSJ's original statement that there were 30% fewer MD millionaires in 2008 than there were in 2007. But some truths are "trivially true"- they're not technically wrong, but that certainly doesn't mean you can infer anything from them. The sensible question to ask about the original "30% decline in millionaires" number was what happened to them. When it was sensibly pointed out that most of these guys just got poor, the WSJ retreated to the "plenty of people really did leave" argument. And now, again, there's a sensible question to ask, which is "how many people move around in a typical year," either in MD or in other states. The MD comptroller's data that started this whole thing is, in fact, a time series, so you can answer this question for MD. See http://www.itepnet.org/Preserv.....naires-T... page 2, for the complete time series. It's certainly true that numerically more people are missing in 08 than in previous years, but it's also true that there's a baseline level of missing millionaires in each previous year. Again, the simple headline obscures the truth. The clear implication of the WSJ headline here is that it's all due to the millionaire's tax.
On substantive point #2, the wording seems perfectly fine to me, and it doesn't seem to me to be at all important a thing to argue about. But here goes: if I say I spend more of my income on vodka than most people do, how is it not obvious that this is a fraction? If I said "I spend more than most people," sure that would be unclear. But when you say "I spend more OF MY INCOME than most people," the fraction (or percentage) is in the darn sentence. Seems quite clear to me. I agree that it would add precision to say "higher percentage of their income" rather than "more of their income," but again, this isn't higher math. Seems pretty basic. If you're arguing that this is a naked attempt to take advantage of people who never learned fractions… well, I'm not sure that is a constituency that's reading much about public policy.
On "the one point CTJ did not address", which as I understand it is "how come this tax hike lost money," I guess my answer would be "revenue estimators are not saying that this tax hike lost money, so why are you saying it?" The income tax base shrank in every state in the nation in 2008, in all likelihood. And states (and there were quite a few of them) that hiked income taxes at the same time raised money by doing so.
It is, of course, conceivable that the 30% decline in millionaires in MD was entirely because of the millionaire's tax. Some of them got mad and left, and the rest got fired or had their pay cut because the added $750 in tax on a $1.1 million salary was just too much for businesses to bear. The comptroller's data doesn't tell us a thing about whether this is actually what happened. But when you assert that this tax cut lost money, you pretty much are asserting that most or all of the decline in the income tax base is because of the millionaire's tax. Which, as I've said already, is a lot more than the fine folks in the MD Comptroller's Office are willing to say.
It would be fun if there were other states we could look at over the same period to see what happened to their millionaires. And there are, in fact, maybe half a dozen states that regularly report statistics of income in a way that breaks out high-end taxpayers. But so far, there is precisely one other state in which an apples-to-apples comparison to MD's experience can be made. That's Utah, which actually lost 60% of its millionaires over the same period. And Utah *cut* their income tax at the same time MD was hiking theirs. What does this prove? Nothing. Nothing at all, except that it's hard to prove anything about the linkage between specific state tax parameters and economic outcomes.
For the record, I tend to think (and serious economists tend to agree) that anyone trying to prove things about the comparative impact of state public policy choices (whether it's the impact of capital punishment on crime rates, or tax stuff, or whatever) using a sample of even 50 states should be laughed out of econometrics class. So when you see people taking a sample of one state and asserting that they know what's going on- well, it's just not good science.
Also for the record, it's absolutely an important thing to think about the relationship between taxation and economic development. But I think the whole "millionaires are leaving" argument doesn't really count as "thinking". It's more akin to starting with your conclusion (income tax hikes hurt economic growth) and looking for anecdotal evidence.
Thanks for the discussion!
[...] Tax ‘Em Until They Flee, Then Tax ‘Em Some More! [...]
[...] media. They’ll be fine unless they really start to thrive — under Gov. O’Malley, Maryland also has raised taxes on its millionaires, thus encouraging many of them to leave the [...]