Perils of "Soaking" The Rich

One of the few items on Obama's 2nd term agenda is to let the Bush tax cuts expire and raise taxes on "the rich" or those earning over $250,000.    This was scored by the CBO to give about $83 billion dollars per year in extra revenue.  That's not much when you have a $1.1 Trillion or $1.2 Trillion deficit.  It's something, or so it appears.

Those revenues may or may not materialize. Don't be surprised if the revenues disappoint. The new president of France recently called for a marginal tax rate of 75% on extremely rich citizens to address yawning deficits there.  He's had to back off this threat when wealthy French citizens openly made plans to relocate to other, more tax-friendly, locales.

Be careful about plans to "soak the rich," they can backfire.  Here's a couple of cautionary tales of ill-advised taxes on the "rich."

Luxury Yacht Tax
From Ralph Reiland at American Spectator

In 1990, Congress passed a 10 percent "luxury tax" on high-end jewelry, aircraft and yachts as a way to force "the rich" to pay their "fair share."

Taxing away another $2 million from a rich guy when he buys a $20 million yacht was supposed to create more heaven on earth.

Instead, 81 percent of the 1,400 workers at Viking Yachts, the largest yacht manufacturer in the United States, were laid off within eight months of the enactment of the yacht tax -- and "the rich" still had their money, and their old yachts.

Egg Harbor Yacht, one of the oldest boatyards in South Jersey, filed for bankruptcy a year after the yacht tax was enacted and laid off its 250 workers.

By the time the law was rescinded in 1993, Viking Yachts was down to 68 employees.

"When it was all over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost in companies that supplied yacht parts and materials," reports economics professor Walter Williams at George Mason University. "The Joint Economic Committee concluded that the value of jobs lost in just the first six months of the luxury tax was $159.6 million."

The impact on the federal deficit during the first year of this shot at creating more "fairness"? Instead of adding a projected $31 million to the government coffers, the net effect of the luxury tax was $7.6 million more in federal red ink.

Luxury Car Tax
A similar thing happened to the tax on luxury cars.  From AIADA.org

To refresh your memory, Congress in 1990 established a Vehicle Luxury Tax on any car sold in the United States for more than $30,000. The 10 percent tax applied only to the amount paid past $30,000; so a person who bought a $35,000 vehicle would have to pay $500 to the U.S. government on top of already existing taxes.

As many predicted, the tax was a bust. Consumers hated it. Dealers hated it. Manufacturers hated it. Ultimately, the government brought in a nominal amount in tax revenue but lost money in other tax revenue areas such as payroll, duties, and income tax. A 1991 study by AUS Consultants showed that the tax led to a 20 percent drop in sales of international brand luxury cars like BMW and Mercedes-Benz. Finally, in 2002, after much lobbying from AIADA, the federal government fully repealed the law.