Proof You can only Push High Net Worth and High Income Individuals So Far!

by Evan

Maryland

One of my favorite sites, The Tax Foundation, had a phenomenal couple posts about Maryland’s so-called Millionaire Tax.  The two main posts are, Maryland’s Millionaires Missing After Tax Hike and Maryland’s Lawmaker Proposes making Millionaires’ Tax Permanent.  Maryland, like many other States out there are hurting for cash, so what else can a state to do except attack high income tax payers.  Remember: No One Cares if We Tax the Hell out of the High Income Earners.  Oh wait…someone does care.  THE EARNER.

Maryland’s Millionaire Tax

As reported by The Tax Foundation Maryland imposed a tax starting in 2008 which taxed high earners:

  • 5% on income between $150,000 and $300,000 (between $200,000 and $350,000 for couples);
  • 5.25% on income between $300,000 and $500,000 (between $350,000 and $500,000 for couples);
  • 5.5% on income between $500,000 and $1 million;
  • and 6.25% on income over $1 million.

That tax was implemented in 2008.  Well, what occurred:

One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Some died, but the others presumably changed their state of residence. (Hint to the class warfare crowd: A lot of rich people have two homes.)

A Bank of America Merrill Lynch analysis of federal tax return data on people who migrated from one state to another found that Maryland lost $1 billion of its net tax base in 2008 by residents moving to other states. That’s income that’s now being taxed and is financing services in Virginia, South Carolina and elsewhere.

States like Florida and Texas have no personal income tax, so the savings for a rich person who stops paying taxes in Baltimore or Montgomery County can be in the hundreds of thousands of dollars each year. Montgomery County, outside of Washington, D.C., is Maryland’s wealthiest and was especially clobbered, losing nearly $4 billion in taxable income in 2008, with some 80% of those lost dollars from high-income returns.

Thanks in part to its soak-the-rich theology, Maryland still has a $2 billion deficit and Montgomery County is $760 million in the red. Governor Martin O’Malley’s office tells us he wants the higher rates to expire “as scheduled at the end of 2010.” But there are bills in both chambers of the legislature to extend the surcharge. The state’s best hope is that politicians in other states are as self-destructive as those in Annapolis.

Tax them too much, and high earners will just leave!

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43 comments

Ron March 16, 2010 - 9:15 am

The class warfare crowd just doesn’t understand. One of my favorite phrases is: “What gets rewarded, gets done.” But it’s inverse is also true: Punishment pushes people another direction and if they have a choice, they’ll move.

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Evan March 16, 2010 - 11:31 am

I have never heard of that saying before, but it is so accurate it is scary. It sounds very Adam Smithish

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FinEngr March 16, 2010 - 3:04 pm

Though not a high income earner (yet), that’s a gross generalization about the rest of us. I can empathize with high IE and NW, and don’t think its fair to have a sliding tax scale. Prefer flat tax or consumption tax.

However, I think there needs to be differentiation between what your identifying as the “class warfare” crowd.

There are those who want a free lunch – either because they see no improvement from their current position or simply think it’s “unfair”. In this case, yes, those moochers don’t understand that you can only push so much before you get a reaction.

While legal, there’s an ethical gray area with taxes that many high IE and NW cross. These demonstrations of tax evasion, fraud, whatever are what make the remainder of the class upset.

Of course, we could debate what should be appropriated by the govt (roads/education vs. social security/healthcare), but the point is [most] everyone benefits from public investments.

Who ends up truly hurting is the “honest, medium-rich”. Those individuals who’ve earned a healthy income AND pay their fair share of taxes.

I’m sure if we delved into Del. Jolene Ivey’s statements, we’d find plenty of “business” write-offs or “charitable” donations and this bill is yet another effort to appease the pitchfork masses and solidify her political career.

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Evan March 16, 2010 - 3:47 pm

An increase in taxes will not solve allegedly unfair tax breaks. So even if there is a group within the “I hate Rich” (however they want to define rich) group – that believes its fine to increase because of the breaks – the breaks will still be there.

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FinEngr March 16, 2010 - 3:58 pm

*Sigh*

For all the time spent crafting the comment, it seems like follow-ups are always necessary :p

Not arguing for the increase or against the breaks, more going for separation and/or clarification on the general group classification. And guess pointing out that the “super-rich” still win in the end.

Financial Samurai March 16, 2010 - 8:36 am

Wait, just to clarify, cuz I don’t live in Maryland.. is the 5.5% tax an extra tax on top of whatever the MD tax rate is?? What is the MD state tax rate anyway? It’s a whopping 10% here in California, which is the reason why I’m retiring in Lake Tahoe, Nevada!.

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Evan March 16, 2010 - 11:30 am

There are other tax brackets:

http://individuals.marylandtaxes.com/incometax/ratesbrackets.asp

The main one looks to be 4.75% from 3K of income to $150K

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BibleDebt March 16, 2010 - 9:23 am

We have an issue with high business taxes in Michigan. There are tax breaks, but an overall tax reform and decrease is what is needed to heal the highest unemployment in the nation. Maybe we can spend just a little less and see if that might help our budget issues.

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Evan March 16, 2010 - 11:32 am

Michigan has a high business tax?! Ummm have they seen detroit lately, maybe they should back the hell off of taxes for a bit.

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Jason March 16, 2010 - 11:22 am

This is the exact mentality that screwed California over the last generation. As beautiful as CA is, people leave when property values get high, income & sales taxes go through the roof, and businesses become overly-regulated.

It’s just a disaster when all this happens, especially at the same time. That’s why Texas & Oklahoma are doing relatively okay. Cheap to live and decent-paying jobs.

Legislatures playing the class warfare game are thinking in a vacuum. How is it not obvious that 1 in 8 MD millionaires would be no-shows come tax time?? Incentives work MUCH better than perceived punishments.

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Evan March 16, 2010 - 11:34 am

Playing with those making $300K and up seems like a good idea because it affects very few, and they can’t bitch about it too publicaly because I mean come on they are in the top 1% of earners. lol

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Jason March 16, 2010 - 4:20 pm

True, they can’t bitch about it too much publicly. But income tax revenue is like the super-volunteers in the church nursery. 80% of the work is done by 20% of the people.

Likewise, when 80% of the lifting is done by 20% of the taxpayers (it’s actually a bigger discrepancy), then they’ll start to get pissed. And then people start looking to redefine where exactly they are domiciled 🙂

I don’t mind a graduated income tax, but too much power is now concentrated in the hands of those that didn’t contribute. It’s always easier to tell someone else to pay more money when you have no vested interest yourself. The working poor pay taxes in other ways (gas, sales, etc.), I’m not denying that. But issues appear when half the population, who don’t pay a dime in income tax, can now dictate tax rates to those who DO pay the taxes. I have a feeling the “rich” would bitch a bit less if they felt like others were bearing some of the burden.

Having a vested, direct interest will always alter behavior. When there’s no direct, vested interest, there’s no accountability or responsibility. It works the same way with anything that’s collectively owned. No health insurance deductible? Sure, go to the Emergency Room every time you sneeze three times in a row. No HOA dues? Then no one gives a $hit if those kids spray paint the playground.

Geez.. I may have stumbled across a new post for my site LOL. I digress..

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FinEngr March 16, 2010 - 4:00 pm

But doesn’t allow a “slippery slope” like vice taxes?

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Evan March 16, 2010 - 4:07 pm

100% Agree with you, it is a scary slippery slope. Alliteration aside, it is easy to see *why* it is easy for cash strapped states to try this route.

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FinEngr March 16, 2010 - 2:40 pm

California is a disaster (sorry FS).

Read any articles about that new Prius “hoax” Jim Sikes?

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FinEngr March 16, 2010 - 4:01 pm

@ Jason.

Sorry didn’t mention this before – thumbs up on that last line!

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Jason March 16, 2010 - 4:06 pm

My first thought was.. “WHAT last line?” So I come back and read my comment. Yeah, I like that line too! LOL – thanks.

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Kevin M March 16, 2010 - 1:54 pm

I bet the crap economy and decreased taxable capital gains during that period also had a lot to do with it.

If it’s just people changing their home state, I smell a LOT of audits coming since that is difficult to sustain even if you have 2 homes. You can’t just randomly pick where you have your principal residence….well I guess you can, but someday the tax guys will come knocking.

I’m not sure I agree with higher tax rates at higher incomes, but just as crappy is the people that DO live there and get county/state services that aren’t paying taxes to support it.

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FinEngr March 16, 2010 - 2:42 pm

Kevin –

Been seeing more articles on this very topic. Saw some figure on what the IRS loses annually do to fraud (whether mistake or purposeful). That knock may come sooner than later, ramping up to collect that money.

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Evan March 16, 2010 - 3:49 pm

It has been a REALLY long time since I took introduction to income taxes, but isn’t your domicile for taxes a subjective determination of whether you have left one state and went to another with no intent to return back to that original state?

OR am I already making up arguments for future clients who get audited lol

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FinEngr March 16, 2010 - 3:54 pm

Thought it was dependent upon how much time you spent in each area. Whichever was the majority was your determined residence.

Consult military or retirees on this one 😉

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Evan March 16, 2010 - 3:58 pm

You might be right, I may be thinking of Estate Taxes.

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Kevin M March 16, 2010 - 5:18 pm

@Evan – SUBJECTIVE being the key word. I was mostly talking about people with 2 homes. If someone is working in MD but has a second home in FL or wherever it would be really hard to say your “tax home” is in FL.

They could also look at stuff like where your cars are registered, pay personal property tax, where you register to vote, where you get mail, where your main bank is located, etc.

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Money Reasons March 16, 2010 - 8:01 pm

America should be fair, and additional taxes on the wealthy isn’t.

Jason covered my thoughts exactly in his comments…

Well, at least people are waking up and elections are taking a turn for the better!

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Evan March 16, 2010 - 9:41 pm

I believe that the November elections will be analogous to the 2006 and the 1994 elections where incumbents are going to have a huge problem.

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Kevin M March 17, 2010 - 12:02 pm

You’re in serious denial if you think Republicans will do anything to help this situation. Did you take a look at how much national debt increased under Bush II?

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Evan March 17, 2010 - 1:17 pm

I don’t believe Republicans will save the day, by any means. I do believe that people are angry and will boot a lot of those in office especially Dems.

It really does suck, but they are almost the same party nowadays.

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Don March 17, 2010 - 10:13 pm

Well, I was never a big Bush fan (sometimes you can judge a book by it’s cover), but I do know that with more republicans in the government, we’ll get a better balance. This will stop such government expansion into areas that they should be in…

Really… has the government ever run any domestic program well???

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Investor Junkie March 18, 2010 - 10:16 pm

Gridlock is always a good thing!

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csdx May 16, 2011 - 11:15 am

Let’s see: Most people like the interstate highway system, air travel is statistically the safest mode of transportation, you get clean water right in your house, perhaps you’ve heard of this thing called the internet which originated from government research, smallpox has been entirely eradicated and many common diseases are all but unknown in the US… yeah the government can’t do anything right.

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Evan May 16, 2011 - 12:27 pm

I actually don’t think your comment has anything to do with the conversation?

Jason May 16, 2011 - 12:40 pm

I think it was a retort to Money Reasons questioning “has the government ever run any domestic program well???”

Gov’t can run certain things well. Whether they should, or whether they run enough things well to justify further control, is certainly up for debate.

Matt SF March 16, 2010 - 8:38 pm

I’m all for the out-performers carrying more of the load, but there is a limit at how much people can be pushed, or taxed, in this case. As you pointed out, they just pick up and leave.

The same goes with a friend of mine moved here (to the U.S.) from Brazil to attend medical school and now he finished his residency, he’s making serious bank.

Now that he’s a large earner, he keeps saying he’s headed back to Brazil because of the tax burden and malpractice insurance. Not sure what it’s like there, but in his eyes, it’s a bargain compared to here.

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Evan March 16, 2010 - 10:00 pm

I know nothing about Brazil (other than the Women are supposedly nutty lol) but it seems odd to pay the crazy American Med School costs to go back down?

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harvestwages March 17, 2010 - 10:18 am

Great post
Didn’t know Florida and Texas have no personal income tax.

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Darwin's Finance March 18, 2010 - 6:58 pm

My favorite line justifying this type of class warfare is “If you have to worry about taxes that much you’re making too much money”. If you go back 30 years both the states and Fed govt got by with a fraction of the tax rates we have now. Growing govt, fatcat govt worker pensions and union wages are sucking the country dry. I fear for the future of our children. We’re truly leaving them a worse country than the one we got to enjoy.

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Daddy Paul March 18, 2010 - 9:33 pm

Just think how many would have left if the state had made it 15 percent?

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Roger March 22, 2010 - 9:03 pm

Hunh, interesting situation. The problem with trying to tax those most able to pay is that they are also the most able to avoid taxes. From fleeing to other states to fighting the taxes through legislative means, there’s few options those with wealth don’t have.

Of course, there is one issue I feel compelled to raise: correlation is not causation. At no point in the articles linked was there proof (in the form of interviews with a representative sample of those millionaires who left, for instance) that the higher tax rates were in fact the reason they left. It doesn’t sound as if they were even really sure that the 1/8 of Maryland’s millionaires who left the state were still in the country. Without knowing where they ended up or why they left, I’m less than fully convinced that ‘higher taxes cause millionaires to flee’ is a true causality.

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Evan March 23, 2010 - 1:42 pm

I get that correlation is not causation, but that is an odd statistic.

EVEN if they left the country that is even worse for us as whole, especially with Big O’s ideas to tax the shit out of those with million dollar incomes to pay for EVERYONE’s health care.

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Roger March 23, 2010 - 5:59 pm

Oh, don’t get me wrong, I do think that some, if not most of the ‘missing millionaires’ likely relocated, probably to places where they’d pay lower income taxes. I’m just saying, it’s not a full proof argument, as where they went could have a big impact on the interpretation of the move. If many of them relocated to states (or countries) with even higher taxation, like California (or France), it kind of makes the idea that high taxes lead to millionaires fleeing as fast as possible seem far fetched. Heck, there’s not even solid data on how many (if any) of the millionaires died, so for all we know, 2008 was just a bad year to be a Maryland millionaire.

Again, I’m no saying this is the case (it’s probably not), just saying that without more data, definite conclusions seem a bit of a stretch. (Add in the fact that neither the Tax Foundation nor the Wall Street Journal (where the data and statements were originally published) is known for being pro-tax, and I think a hint of skepticism is called for.)

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FinancialBondage May 3, 2010 - 8:28 pm

Maryland Is called the free state… not sure why.. trust me, nothing here is free. we are taxed to death on everything… and the governments are still struggling to pay its bills.

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Jim Smith December 14, 2010 - 5:55 am

ahh – the lengths people will go to to avoid tax. Wonder how much it cost them to move? More than the amount of extra tax?

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Evan December 14, 2010 - 9:21 am

Jim,

Thanks for checking out the archives! It all depends on what States you are talking about. I am not sure how familiar you are with the US but just moving from New York City to a neighboring State can save a high income earner tens of thousands per year.

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