It is one of the interesting contradictions of politics that political factions sometimes rely on the problems they seek to eliminate for their existence. For instance, it has been widely noted that while it is generally part of the Democratic set of ideals to reduce economic disparity, while Republicans tend to be accepting of it, Democrats are most successfully elected in areas with high economic disparity and Republicans are most successfully elected in areas with economic homogeneity. One might imagine that this is because those who actually experience inequality see the folly of their actions and switch to become Democratic voters, and perhaps there’s some level of truth to this, but still it seems odd that the Democratic hold on a region strengthens as its inequality increases. In other words, they do better if their goal of creating a more egalitarian economy fails.
I was reminded of this reading an article this morning about a group of newly elected Democrats in the House who are from some of the nation’s wealthiest congressional districts. (Democrats now control 14 out of the 25 richest congressional districts in the country.) These congressmen are worried about a provision in the pending health care legislation which would fund much of the new spending with a tax increase of 1-5.4% on income groups making $350k/yr or more.
I don’t have an objection in principle to taxes that hit the rich harder than the poor. As was observed about the reasonableness of robbing banks (if one is going to be a robber): That’s where the money is.
However, this approach (which was central to Obama’s campaign promises) of providing benefits to everyone based on taxes which only touch the top few percent of the population presents two practical problems:
In the short term, the richest people tend to have some of the most variable incomes. While it will almost surely hit headlines when the CEO of a company which is awash in red ink is given a bonus of tens of millions of dollars, the rich tend to get a lot of their income from capital gains, business profits, and incentive-based or otherwise variable compensation. Thus, they see a much bigger change in income when the economy hits the skids. This has been hitting some states that rely heavily on income tax very hard this year. For instance, California, which gains a significant portion of its annual income tax returns from a few hundred incredibly wealthy tax payers, has seen its income tax returns shrink 33% this year. So funding national health care through a 1% tax on those making over 350k and a 5.4% tax on those making over 1mil is setting yourself up for a lot of budgeting turbulence.
In the longer term, it simply seems contradictory for a party which pledges itself to reducing income inequality to stake a major portion of the funding for their signature piece of legislation on taxing people making over a million a year. After all, if they’re successful far fewer people will be making over a million a year. Why build a program on an income base you’re intend on destroying?
As I see it, there are two pretty clear possibilities that would explain this course of action:
1) There is actually no expectation in the Obama administration of reducing income inequality. They simply want to siphon off some money from the rich to keep the poor more contented with their lot.
2) The tactic of taxing only the rich to pay for an expensive new program is considered a good way of getting an expensive program in the door without people asking many questions, and there is the full expectation of making significant middle class tax increases later in order to make up for the “unexpected shortfall”.
My personal suspicion would be that the former is the explanation.