Reluctant Class Warriors

Do Dems finally understand the collateral effects of taxing the "rich"?

By Kimberley A. Strassel
Friday, August 3, 2007 12:01 a.m.

Back in the hot summer of 1990, Senate Majority Leader George Mitchell proudly engineered the infamous "luxury tax," a nasty little tithe on everything from furs to jewelry to yachts. Democrats were proud: Not only were they throwing new dollars at the Treasury, they'd done it by socking it to the rich. The wealthy, in the words of then-House Majority Leader Dick Gephardt, would finally pay "their fair share."

Within a year, Mr. Mitchell was back in the Senate passionately demanding an end to the same dreaded luxury tax. The levy had devastated his home state of Maine's boat-building business, throwing yard workers, managers and salesmen out of jobs. The luxury tax was repealed by 1993, though by the look of today's tax debate, its lessons haven't been forgotten. Top Democrats are working to implement a new class-warfare tax strategy, only this time they're getting pushback from those in their party who fear the economic consequences.

Nancy Pelosi and Harry Reid, for their part, are steaming ahead with a plan ripped straight out of Mr. Mitchell's 1990 playbook. They're sitting atop years of pent-up spending demand that is now starting to bust free. Their liberal members want to give more money to gentleman farmers, take credit for expanding health insurance for "the children," and write checks to all those struggling renewable energy titans, like Archer Daniels Midland.


At the same time, the new majority is in a short-term box. They ran on fiscal responsibility, and now (bummer) are expected to live up to their paygo pledge to offset new spending with money from elsewhere. Where do they get that money? They aren't about to cut entitlements, and the so-called "tax gap"--that vast sum of uncollected IRS money that Democrats last year explained would cover all their expenses--is a fiction. The top ranks also recognize it would be political suicide to propose broad tax hikes--at least this early in their reign.

Their approach has instead been to follow Mr. Mitchell down that seductive luxury-tax path. Tax hikes are flying out of House and Senate committees, though what they all share in common is that each is laser-targeted on some rich or disreputable industry. The carried-interest tax would soak greedy hedge-fund managers. The "Blackstone tax" would hit wealthy private equity partnerships. A new farm-bill tax would siphon dollars from the U.S. subsidiaries of big foreign corporations. A repeal of a domestic deduction would suck money out of dirty oil companies. The tobacco tax needs no explanation.

As in 1990, many Democrats are feeling confident about this tax-the-rich plan. It builds nicely on the class-warfare themes they expounded in last year's election. It puts some Republicans--at least those who aren't keen to stand up for smokers--on the defensive. And, they hope and pray, it allows them to raise money while avoiding the tax-and-spend moniker. After all, they aren't giving America tax hikes, they're giving America "tax justice." If you see what they mean.

Their problem is that, at least for now, a substantial number of their own party doesn't see what they mean. And it's why, despite months of hearings and wrangling and arm-twisting, few of these tax proposals have seen the legislative light of day. For every liberal who fondly recalls Mr. Mitchell's initial demagoguery of the rich, it seems there's another Democrat who remembers Mr. Mitchell's tattered, lifeless boat industry. Many understand that taxes on the "rich" have a way of spreading their pain around to everyone, and they don't want their own district to be next.

Witness the pushback. Class warrior Sander Levin from Michigan introduced House legislation levying higher taxes on hedge fund and private equity managers' earnings back in June. It took until the end of July for Senate Democrats to start publicly trouncing the idea. Washington's Maria Cantwell worried the tax would hurt returns for her state's public pension fund, which makes a pretty penny off the back of private equity funds. Others fretted it would drive their private equity companies offshore. As for the almighty Chuck Schumer, patron senator of Wall Street, he declared his opposition to any tax that wasn't also levied on non-finance industries. And since Mr. Schumer is the one doling out money for next year's Senate re-election races, that may well be the end of that tax idea.

Over in the House, tobacco-state Democrats have already taken a scalpel to the Senate's proposed 61-cent federal tax on cigarettes, whittling it down to 45 cents. Even then, 10 Democrats--several hailing from the tobacco havens of North Carolina and Tennessee--voted against the child health-insurance legislation that included the tax. Their defection makes it that much harder for Ms. Pelosi to consider an override of a presidential veto.


Madame Speaker, meanwhile, spent what was by all accounts an unfriendly hour last week trying to coax Democrats from oil-patch states to sign on to her oil-company tax hike. As of yesterday, she hadn't had much luck; Texas's Gene Green and about two dozen other oil-state dissidents were holding firm against the $16 billion tax package leveled directly at their home-state economies. It was unclear whether Ms. Pelosi could even risk bringing her vaunted energy legislation for a vote before August recess. Chief tax writer Charlie Rangel has faced so much in-party blowback to his idea of heavily taxing "the rich" in order to finance an alternative minimum tax fix, he has yet to introduce legislation.

"What Charlie Rangel is encountering--and he has found this shocking--is that within his Democratic ranks he today has parochial interests with foresight," says Dick Armey, former House majority leader and current chairman of FreedomWorks. "These folks aren't going to come back a year later with a George Mitchell revelation. They're looking forward now, to what all this could do to their districts, and it's making it difficult for those proposing taxes."

This isn't to suggest some of these bad taxes won't go through; they will. But it's encouraging to know that, even amid this latest round of Democratic class-warfarism, the party harbors a minority who understands that taxes do have economic consequences. You can almost hear the ghost of the luxury tax past rasping away in the background.