Why Minnesotans should be wary of Gov. Walz’s plan to hike taxes on the rich

During the presidential campaign last year, President Joe Biden made one thing clear– his tax plan was not going to raise taxes on anyone making less than $400,000 a year. But just recently the White House made a clarification that the $400,000 threshold applies to families and not individuals. That means individuals making over $200,000 will potentially be hit by tax hikes.

Generally, most people understood Biden’s $400,000 to apply to individuals, not families. So, it is quite possible a lot of people were misled from the beginning. But regardless, there is something to be said regarding the low cut-off for tax hikes that were marketed as “only targeting the rich”. Surely when most people think of taxing the rich, they think of “millionaires” and “billionaires”. So, why is the threshold for who is “rich” at $200,000?

Taxing the very rich is not very profitable

The fact of the matter is, taxing the richest of the rich is not such a goldmine as most politicians tend to make it seem. Not only are the rich very few compared to the rest of the population, but they also respond to tax hikes by changing behavior. More often than not, tax hikes that target the richest of the rich fail to raise the expected revenue. Sooner or later, the not-so-rich have to pick the tab.

In Minnesota, for example, when Gov. Walz unveiled the Minnesota COVID-19 Recovery budget he made sure to emphasize one statement–no household making less than $20,000 a week will see their taxes go up. Needless to say, there are a few households making that kind of money in Minnesota–roughly 21,000 or 0.7 percent of all Minnesota households. Taxing that tiny percent of households to fund services for the poor makes political sense as it appeals to the majority of the population not being taxed. After all, people seem to not mind higher taxes when they fall on other people, they actually encourage them.

But this should tell us what to expect to happen next when governments run out of rich people to tax– they target middle and low-income people who are in abundance. Taxes generally discourage income-producing activity. And our income tax codes–both at the federal and state level– are already so progressive. So, it is illogical to assume that the few high-income individuals that already pay too much taxes will not take action to reduce their tax burden one way or another.

The rich change behavior in response to taxes

The rich are not just aimlessly waiting to be taxed into oblivion. This is why proposals to tax the rich have failed to bring estimated tax revenue.

Maryland created a special “tax on the rich” that legislators said would bring in $106 million. Instead, the state lost $257 million. Some of Maryland’s rich just left the state. When New York state hiked its income tax on millionaires, billionaire Tom Golisano moved to Florida, which has no personal income tax. “[M]y personal income tax last year would’ve been $13,800 a day,” he told us. “Would you like to write a check for $13,800 a day to a state government, as opposed to moving to another state?”

Minnesotans should, therefore, be wary of Gov. Walz when he says his plan only hikes taxes on the rich. The rich will move from Minnesota–as they have done time and time again–, or find some other ways to reduce their tax burden. And when that happens, the only way for Minnesota to afford spending on all the proposed programs aimed at helping the poor will be to tax the not-so-rich, i.e., the $70,000 households. Taxing both the rich and nonrich heavily is, after all, how most European countries afford to sustain an expansive welfare state.