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Democrats aim to tax the rich — but who are they?

First they said it was couples making more than $250,000. Now they've proposed a 'millionaires tax.' Consensus is proving to be elusive.

October 08, 2011|By Kathleen Hennessey, Washington Bureau
  • Senate Majority Leader Harry Reid of Nevada, left, and Sen. Charles E. Schumer of New York discuss the Democrats' proposed new tax on people who make more than $1 million a year.
Senate Majority Leader Harry Reid of Nevada, left, and Sen. Charles E. Schumer… (Jim Lo Scalzo, European…)

Reporting from Washington — President Obama and Democrats in Congress have aligned on a populist, "tax the rich" strategy for the 2012 campaign. Now they have to figure out exactly who that is.

It was clear they had not resolved the thorny question last week, as Senate Democrats unveiled a new "millionaires tax" to pay for the president's jobs bill. The proposal neatly replaced Obama's preferred funding plan and probably bolstered the bill's chances in the Senate. But it also appeared to depart from the party's previous characterization of "the haves we're asking to have less."

Obama and his fellow Democrats for years have described the wealthy as couples making more than $250,000 and individuals making more than $200,000 — 3% of U.S. households. By shifting away from that number in hopes of benefiting from the sound-bite punch of a millionaires tax, the administration may find it difficult to return to casting the broader net.

Since his presidential campaign, Obama and most Democrats have advocated allowing the George W. Bush administration's tax cuts to expire for incomes exceeding $250,000. The president used the same cutoff last month in outlining his plan to pay for the $447-billion jobs package.

Those efforts have not been abandoned, the president said, even as he endorsed the Senate Democrats' proposal.

But the smaller footprint of a tax only for people who make more than $1 million a year proved too appealing for Democrats. Facing a fierce campaign season in an ugly economy, raising taxes is a risky proposition. Raising taxes on the wealthy — a 5.6% tax on income exceeding $1 million — is far less so.

The Senate Democrats' plan would affect just two-tenths of 1% of U.S. households, according to the nonpartisan Tax Policy Center.

The shift marked a victory for Democrats from parts of the country where the cost of living is high. Families earning $250,000 in their regions, lawmakers argued, look more like middle-class, dual-income worker bees than tony yacht owners.

"They are not rich," said Sen. Charles E. Schumer (D-N.Y.), a leading proponent of the tax on wealthier people. "In large parts of the country, that kind of income does not get you a big home or lots of vacations or anything else that's associated with wealth in America."

But critics see a dangerous policy precedent in defining "the rich" by what they can buy, not by how their incomes compare with those of other taxpayers.

Households making a combined $250,000 are earning about five times the national average, according to 2009 census figures.

"These are people who are richer than almost everybody else. If that's not rich in a rich country like America, what could possibly be rich?" said Robert McIntyre, director of Citizens for Tax Justice, a left-leaning advocacy group.

Polling shows Americans have varied definitions of how much money is enough. A 2008 Pew Research poll found that, on average, Americans believed a family of four needed $70,000 a year to live a middle-class life.

But that number rose as respondents' incomes rose. People earning between $100,000 and $150,000 put the number at $80,000, in part because they were more likely to live in high-cost areas, researchers found.

There's no set definition in the policy circles either.

"There is economic literature on optimal taxation, but that ain't what motivates these decisions," said Jared Bernstein, an economist and former economic advisor to Vice President Joe Biden.

A host of political horse-trading and handicapping has long dictated how policymakers shape tax brackets.

Obama's threshold was based on broad principles, including the desire to leave the middle class untouched by higher taxes while collecting "enough" tax revenue, Bernstein said, although even he quibbles with the president's cutoff and suggests that a broader tax increase may be needed in the future.

Going in the other direction — aiming for incomes of $1-million-plus — would yield far too little revenue to fund "a recognizable government," Bernstein said. While the Democrats' surtax proposal may make sense to pay for a jobs bill, "it's actually quite important that $1 million does not become the new $250,000 when it comes to the permanent tax base," he added.

Democrats say they haven't given up on the lower number.

They may, however, be giving up on any hope that Republicans will concede.

"I'd vote for $250,000, but it may be that we don't have the votes politically," said Rep. Barney Frank (D-Mass.). "A million is better than nothing."

kathleen.hennessey@latimes.com

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