Tuesday, May 26, 2009

When Fleecing the Rich Goes Bad

Maryland is learning the painful lesson of what happens when rich people decide they don't want to pay their "fair share."

Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.

It's unlikely all "the rich" are going to move out of the U.S. when Democrats get around to making them pay "their fair share," but President Obama should learn one thing from Maryland's pain: when people think they're getting fleeced, they will use every loophole available to avoid paying taxes. At lower rates, this doesn't happen.