Soak the Rich or Soak the Super Rich?

Harry Reid's "millionaire' surcharge" is a new move in the old Democratic game of class warfare.

For Democrats, millionaires are the new Gypsies—a minority whom it is perfectly acceptable to persecute because its wealth is ill-gotten, not the product of hard work.

There is no better evidence of this than the "millionaire surcharge" that Democratic Senate leader Harry Reid of Nevada proposed to pay for President Obama's jobs bill. His version of the bill was defeated last week on a cloture vote, but that in no way suggests Democrats will abandon this rhetoric as the presidential campaign ramps up.

Obama's original funding plan was bad enough. It sought to specifically eliminate tax breaks for disfavored businesses like oil companies and hike taxes on families making over $250,000 a year. But Democratic senators from oil-rich states (such as Louisiana) and from those with lots of sub-millionaires (such as New York) nixed that idea. (Sen. Chuck Schumer hilariously complained that households in New York hauling in $300,000 annually are not rich because they can't afford nice vacations.)

So Reid changed Obama's soak-the-rich scheme into a soak-the-super-rich scheme. His plan would have left everyone else's taxes essentially untouched. But super-rich people faced an additional 5.6 percent tax on every dollar of their unadjusted gross income beyond a million, pumping $450 billion into Uncle Sam's pocket over 10 years.

If Reid had gotten his way, the top marginal tax rates in this country would have hit 50 percent, noted Howard Gleckman of the liberal Tax Policy Center. That's because the new surcharge would have come on top of the 0.9 percent ObamaCare surtax on the rich and the possible rollback of the Bush tax cuts for higher income brackets.

To think the super-rich would passively accept such fleecing is absurd. Millionaires have a mysterious way of vanishing from states that institute such taxes. Maryland imposed a millionaire tax in 2008; a year later, a third of its millionaires disappeared from its tax rolls. After Oregon raised income taxes on the richest 2 percent of its residents in 2009, about one-quarter of rich filers went missing. Ironically, even as Washington considered this tax, states around the country were abolishing similar ones, including New York, New Jersey and Maryland.

It is, of course, much easier for wealthy folks to escape state taxes than national taxes, especially since the United States in 2008 started imposing exit taxes worthy of totalitarian governments on rich Americans trying to leave the country. But if the rich can't flee, they can hire high-priced lawyers to find tax loopholes. They can also stop working and investing before they hit the million-dollar mark—hardly a formula to grow the economy or jobs.

Obama at least felt the need to soft-pedal the soak-the-rich aspects of his plan by trying to spread the tax burden as widely as politically possible. Reid experienced no such compunctions. "In fact, by replacing the potpourri of tax increases, Obama would have used to pay for his stimulus bill with a simple, easy-to-understand millionaire tax, the Senate Democratic leader has done a wonderful job of clarifying his party's message," Gleckman noted sarcastically.

Separating the rich from the poor always involves some arbitrariness. But the Reid tax schema completely dispensed with ordinary understanding, classifying folks earning $999,999 among the middle class subject to ordinary tax treatment while labeling super-rich those earning $1 more.

Why Reid & Co. drew such a bizarre line is obvious. Class warfare has little resonance in a country with rapid income mobility. Indeed, a 2011 Gallup poll found that only 1 percent of Americans mentioned income inequality as the most important problem facing the country.* That's because most Americans expect to move several quintiles up the economic ladder during their lifetimes. Only the rarefied top seems out of reach. Placing people who occupy that spot into a separate political class is the only class-warfare strategy that won't generate widespread opposition.

A soak-the-super-rich agenda needs suitable rhetoric—to which end supporters excavated long-discredited Marxist tropes. A blogger on the Daily Kos recently illustrated this perfectly when he declared the millionaire surcharge a "small down payment to return the wealth to the people" whose wages and benefits CEOs have been "bludgeoning" for a generation.

An unholy nexus between Wall Street and Washington certainly allowed some financial companies to get rich at the expense of taxpayers. However, that hardly describes the vast swath of America's private enterprise. Steve Jobs and Mark Zuckerberg did not rob taxpayers to create multibillion-dollar companies from scratch. But a persecutory mentality, in its zeal to ascribe collective guilt and mete out collective punishment, can't admit such distinctions.

Democrats want to make millionaires the minority that everyone loves to hate. The failure of Reid's bill suggests that their campaign may have stalled. But that doesn't mean we won't be seeing this kind of class-war tactic crop up again in the future.

Reason Foundation Senior Analyst Shikha Dalmia is a columnist at The Daily, where this column originally appeared.

*Editor's Note: This column originally attributed this statistic to the Pew Economic Mobility Project.