The New Party of the Rich

By Donald Lambro
Thursday, November 29, 2007

WASHINGTON -- Perhaps the biggest shift in American politics is the growing affluence of the Democrats' congressional constituencies and the influence they wield over party tax policy.

While Democrats like to portray themselves as the champions of middle- and lower-income Americans, a new study finds that they now represent a majority of the country's wealthiest districts and their richest voters are the ones they are listening to when it comes to tax reform.

In a little-noticed, district-by-district study of incomes, based on Internal Revenue Service and U.S. Census Bureau data, the Heritage Foundation not only found a majority of the nation's richest districts were represented by Democrats but more than half of the wealthiest households were concentrated in the 18 states where Democrats hold both Senate seats.

"If you take the wealthiest one-third of the 435 congressional districts, we found that Democrats represent about 58 percent of those jurisdictions," said Heritage vice president Michael Franc, who directed the study.

The flip side of this political equation is equally surprising. Franc's study found that, contrary to the Democrats' propensity to define Republicans as the party of the rich, "the vast majority of unabashed conservative House members hail from profoundly middle-income districts," he said.

But a deeper examination of his findings reveals how these well-heeled Democratic constituencies are using both their affluence and influence to change tax policies that would cut into their wealth. And key Democrats are only too happy to accommodate them.

"What the data suggests is that there will be a natural limit to how far and how much the Democrats can sock it to the rich, because in doing so it means they will have to sock it to their own constituents," Franc said.

"Increasingly, we will see Democrats responding to the economic demands of this particular upper-income constituency," he said.

We have already seen their influence in the Democrats' turnaround on the alternative minimum tax (AMT) that they enacted in 1969 to prevent wealthier taxpayers who used available tax breaks to avoid paying taxes on their income.

What happened is that, as middle-class incomes rose, people found they were being shoved into higher brackets that socked them with the AMT. The largest share of these taxpayers live in overwhelmingly Democratic "blue" states of the Northeast, Midwest and the West Coast.

It wasn't long before liberal Democrats in these areas, such as New York Sens. Hillary Clinton and Charles Schumer, were joining Republicans in pushing to eliminate the AMT.

A "stop gap" bill to prevent millions of taxpayers from being hit by the AMT next year, authored by New York Rep. Charlie Rangel, the chairman of the powerful tax-writing Ways and Means Committee, passed the House this month.

But the influence of the Democrats' rich friends was just beginning to be felt. To offset the revenue losses from AMT's repeal, Rangel's bill proposed raising taxes on Wall Street financiers and hedge-fund titans, many of whom are major contributors to the Democratic Party.

Rangel's bill would tax hedge-fund compensation as regular income at the 35 percent top rate, instead of the current 15 percent capital-gains rate paid now.

That's when powerful, well-funded lobbyists, bankrolled by hedge-fund managers, went to work. It wasn't long before Schumer, the Democratic Senatorial Campaign Committee chairman who has raised millions from these same financial managers, came out against Rangel's soak-the-rich, anti-investor bill.

Democratic Sen. Max Baucus of Montana, the Senate Finance Committee chairman who said the tax hike was a bad idea and would never pass in the Senate, followed Schumer.

Other Democrats are squirming over the tax-the-rich scheme as well. Rep. Rahm Emanuel of Illinois, the House Democratic Caucus chairman, wants a stand-alone fix for the AMT without a tax-hike offset, worrying that it could hurt Democrats in November. Some Democratic Blue Dogs have criticized the tax-hike offset, too.

Democratic analysts readily acknowledge what's going on here. "As far as the hedge funds and tax breaks go, the Democrats are clearly getting a lot of money from people who are affected by that, and they're responding," said Dean Baker, co-director of the liberal Center for Economic and Policy Research.

This is a story with profound political implications for Democrats who will have a hard time bashing Republicans next year as the party of the rich once the story gets out that they are protecting immensely wealthy hedge-fund managers from the IRS.

"The demographic reality is that the Democratic Party is the new party of the rich," Franc says.

Is this the kind of man-bites-dog story that we are likely to see reported on the nightly news shows? Don't hold your breath.