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Thursday, August 09, 2007

Boy, that worked well !

Now that the Democrat controlled Congress is making populist noises about playing the class warfare card, let's visit a little piece of history. WSJ columnist Kimberley Strassel asks the question: Do Dems finally understand the collateral effects of taxing the "rich"?

Back in the hot summer of 1990, Senate Majority Leader George Mitchell proudly engineered the infamous "luxury tax," a nasty little tithe on everything from furs to jewelry to yachts. Democrats were proud: Not only were they throwing new dollars at the Treasury, they'd done it by socking it to the rich. The wealthy, in the words of then-House Majority Leader Dick Gephardt, would finally pay "their fair share."

Within a year, Mr. Mitchell was back in the Senate passionately demanding an end to the same dreaded luxury tax. The levy had devastated his home state of Maine's boat-building business, throwing yard workers, managers and salesmen out of jobs. The luxury tax was repealed by 1993, though by the look of today's tax debate, its lessons haven't been forgotten. Top Democrats are working to implement a new class-warfare tax strategy, only this time they're getting pushback from those in their party who fear the economic consequences.

Tax hikes are flying out of House and Senate committees, though what they all share in common is that each is laser-targeted on some rich or disreputable industry. The carried-interest tax would soak greedy hedge-fund managers. The "Blackstone tax" would hit wealthy private equity partnerships. A new farm-bill tax would siphon dollars from the U.S. subsidiaries of big foreign corporations. A repeal of a domestic deduction would suck money out of dirty oil companies. The tobacco tax needs no explanation.

And, they hope and pray, it allows them to raise money while avoiding the tax-and-spend moniker. After all, they aren't giving America tax hikes, they're giving America "tax justice." If you see what they mean.

This isn't to suggest some of these bad taxes won't go through; they will. But it's encouraging to know that, even amid this latest round of Democratic class-warfarism, the party harbors a minority who understands that taxes do have economic consequences. You can almost hear the ghost of the luxury tax past rasping away in the background.
Not only did the luxury tax cost jobs, it lost revenue on balance.
  • The lost jobs cost $24.2 million in unemployment benefits plus income tax revenue the government didn't get, so taking into account the $16.6 million collected, the net effect of the taxes was a loss of $7.6 million in fiscal 1991.
Boy did they stick it to those rich people. I would call it justice if politicians paid the price for this blunder but they almost never suffer the consequences of such bad policy.


Bret said...

The economic maxim that if you want less of something, tax it, is, as far as I can tell, always true (there must be an exception, but I've never seen it). So it's no surprise that taxing yachts would lead to less yachts which would lead to less yacht builders. It's also not surprising that an abrupt change in the tax structure would cause signficant and visible local economic disruption such as was seen with the Maine boat-builders.

But (you knew there was a "but" coming, didn't you :-), many economists tout the benefits of consumption taxes versus other taxes such as income or corporate taxes as, well, reducing consumption and therefore leaving more money available for investment which should stimulate growth and jobs. That's the basis of supply-side economics, isn't it?

So if the government collected less revenue because of the tax and consumption of boats was clearly reduced per the boat-builders job losses, wouldn't've this untaxed and unconsumed money become available for investment? Shouldn't've that stimulated the economy? Which would've led to higher tax revenues?

Or could it be that those economists in favor of consumption taxes are wrong? My personal feeling is that capital availability is more than adequate right now and that taxes on consumption, even with offsetting cuts on income, would actually be counterproductive, just like what seemed to happen with the yacht tax. Indeed, that's one of the things that lead me to write the Income Inequalitiy and Wealth Creation post. The wealthy (not necessarily super rich, just upper quintile) drive the economy forward.

Demand is just as important as supply. It's a balance that's needed.

erp said...

Everything, taxes included, the left does is for social engineering paid for by redistribution of income from the earners to the slackers.

They don't care if people are out of work because it means they can step in with a welfare program and make more people dependent on their largesse and less confident that they can solve their own problems.