Opinion

How ‘soaking the rich’ clobbers you

Nearly half of American tax filers didn’t have to pay any federal income tax last year. But Americans — especially New Yorkers — shouldn’t enjoy the free ride. Soon enough, everybody will pay for the higher spending that Washington’s “generosity” encourages. And thanks to Washington, we’ll be paying for higher state and local spending at the same time, too.

Just a decade ago, two-thirds of American tax filers still paid into the tax system. But both Democrats and Republicans have spent the last quarter-century inventing and expanding all kinds of voter-friendly tax breaks. Easy-to-use tax software has helped people get every dollar — something that was once less common, because it simply wasn’t worth the bother.

Just a few examples: The earned-income tax credit now gives working-class families up to $5,700 a year. Other tax breaks benefit middle-income people with kids and mortgages.

And this year, thanks to President Obama, we’ve got a temporary $8,000 credit for people who buy a house, as well as an $800 credit for couples with jobs. A Deloitte Tax analysis found that “a family of four making as much as $50,000 will owe no federal income tax for 2009,” the AP reported last week.

New York mirrors the rest of the country. Nearly 42 percent of New York City filers won’t owe federal taxes for 2009, and state and city tax breaks mean that more than a third of these filers didn’t pay state or city income taxes, either, according to an estimate by the city’s Independent Budget Office.

Using taxes to help people get ahead is OK — up to a point.

But everyone should have to pay something — and anyone who earns enough to have cable TV can pay something toward their own national defense, too.

A big majority of people, in fact, should pay enough to be annoyed on April 15 rather than excited. Otherwise, the politicians will figure they can just keep spending without angering a critical mass of voters.

As it is, Washington just figures that when it comes time for tax hikes to pay for all the spending we’re doing with borrowed money, the “rich” will pay.

Case in point: President Obama seems certain to let the Bush tax cuts for upper-income Americans expire — so in January the top rate will jump back to 39.6 from 35 percent. Two years later, a new 3.8 percent tax kicks in on investment income earned by families who make $250,000 and up (part of the health-care bill).

Thing is, the rich already do pay. And when it comes time to pay for all of the spending we’re doing now, the rich may not be able or willing to pay even more.

Taxpayers earning over $200,000 paid more than 54 percent of federal income taxes in 2007, way more than the 32 percent of the nation’s income they earned. In New York, the rich pay even more. Families above the $200,000 mark pay nearly 67 percent of the Empire State’s share of federal income taxes.

It’s the same with our state and local taxes. Mayor Bloomberg regularly notes that 40,000 families making a half-million or more pay nearly half the city’s income taxes, and these same people pay a similarly outsized share of state taxes.

And there’s a limit to how much the government can get. Last year, New York hiked income taxes on people who earn more than $200,000. But, as E.J. McMahon of the Empire Center for New York State Policy noted last month, the expected take from that tax hike seems likely to come in half a billion below estimates.

There’s good reason to think Obama’s tax hikes on the rich will fall short, too. No, federal taxpayers can’t leave the country as easily as a handful of Bloomberg’s Upper East Side neighbors can leave New York — but they can park more money in tax-free investments or simply decline to earn it in the first place. Such tax-avoidance is perfectly legal — but it means less economic growth, and thus less income earned by everyone else.

The longer we wait to learn this lesson, the more painful it will be — especially here at home.

Consider: In the short term, hiking taxes on the rich perversely allows New York to get away with yet more spending — because the state can borrow more cheaply to do it. How’s that? As tax rates rise on profits from stocks and private-sector bonds, wealthy taxpayers will put more money into tax-exempt debt, including . . . New York’s own government bonds.

Thus, Obama’s tax hikes will actively discourage putting money in private investment markets, helping to heal the economy — and encourage investors to pump more money into bloated state and local governments.

The cycle of higher taxes on the rich to fund higher spending will continue — until the rich are just exhausted. That day is coming — and then we’ll all get higher taxes. That’s why we’re hearing talk of a “value added tax” on consumption, which hits middle- and lower-class folks hardest.

People who theoretically have no skin in the game, then, should worry hard about “taxing the rich.”

Nicole Gelinas, Manhattan Institute sen ior fellow, is author ofAfter The Fall.”