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 The luxury tax was repealed by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.