EXODUS

Maryland Millionaires "Just Say No"

Michael Round

May 27, 2009

A budget shortfall.  Common words heard from state governments.  Maryland faced them last year.

How to close the shortfall?

Governor Martin O'Malley had the answer:  "The richest of Maryland citizens were willing and able to pay their fair share."  Tax the rich.

The Baltimore Sun predicted these millionaires would "grin and bear it".

Allen Schiff, who runs an accounting firm in Towson, said, "When you make that type of money, another 1 percent in taxes doesn't matter.  They have the attitude that it is what it is."

What is it?

The increase, from the 5.5% to 6.25%, was minor.

The anticipated tax revenue was major.  Maryland officials anticipated gaining an extra $106 million from the minor marginal tax increase.

The results?  Officials report tax revenue for Maryland millionaires is $100 million less than 2008.

How can this be?

In 2008, approximately 3,000 million-dollar income tax returns were filed by the end of April.  This year, that number fell to 2,000.

The recession is likely a large reason.  Millionaires are no more exempt from the stock market plunge and economic challenges than the rest of us.  The numbers suggest, in fact, they may be more at risk - their fortunes susceptible to the pulse - the highs and lows - of the economy.

However, does this explain a decline of one-third?

Comptroller Peter Franchot is looking into the matter.  "The revenue figures are ugly.  Right now we're digging through a pile of tax returns and trying to understand this."

What happened to these mysterious filers?

It's a loaded question, to begin with.  The "millionaire" category changes from year-to-year.  The 3000 filers in 2008 would likely be different in 2009.  People move in to the category financially, while others fall out.  People move geographically - in and out.

But let's grant the assumption.  1000 missing people.  Where did they go?

Some fled.  Anecdotal evidence mounts many professionals simply got fed up with the combined state and local taxes, and moved to more tax-friendly states.  Only a fool generalizes from anecdotal evidence.  Are we being foolish in suggesting this may be a primary cause for the lack of returns?

How could this be?  Would this minor tax increase be sufficient reason to move?

The governor and the State House did the calculations and determined "no".  The Baltimore Sun said not only is the answer "no", but the millionaires would be grinning while bearing the extra burden.

Spreadsheets were put in motion.  Income distributions modeled.  Percents input.

Everything was taken into consideration.  Or was it?

How was the variable for "enough-is-enough" modeled?  A minor marginal rate - in itself - may not seem much, but already-high taxes combined with high local and state rates - may push a person "over-the-top".  How was this analytic-choice tipping-point considered?

Where was the column for "class-envy" inserted?  The general moral atmosphere of "soak-the-rich" and "make-them-pay-their-fair-share" mentality can drive even the most patient of people "past-the-tipping-point".  How was this class-envy tipping point considered?

Obviously, none of this was considered.

Governor O'Malley, the Baltimore Sun, and the State House, here's a message from the departing millionaires:

"Are you now crying: No, this was not what you wanted?  A mindless world of ruins was not your goal?  You did not want us to leave you?  You moral cannibals, We know that you've always known what it was that you wanted.  But your game is up, because now we know it, too ... We - as victims - took the blame and struggled on, with your curses as reward for our martyrdom - while you went on crying that your code was noble, but human nature was not good enough to practice it.  And no one rose to ask the question: Good? - by what standard?" 

Paraphrasing John Galt in Ayn Rand's Atlas Shrugged.

EXODUS

From a Systems Perspective

A possible conversation overheard in the great halls of the Maryland assembly:

Governor O'Malley:

Our budget is a mess.  A huge shortfall.  That's a problem.  What would be ideal?  A balanced budget, of course.

But how?  To arrive at a balanced budget, we need to raise taxes. 

But we don't want to do this.  Why not?  Nobody will be happy.  Nobody likes to see their taxes go up, and we, as the government, want happy citizens. 

A balanced budget and happy citizens:  two necessary conditions for a government "of, by, and for the people".

But it seems like meeting these necessary conditions puts us in quite a conflict:

How do we break this conflict?  Let's go where the money is - millionaires.  They won't mind paying a little bit more, since they already pay so much.

Problem solved.  A balanced budget, and we've only slightly compromised on our need to have "happy citizens".  Now, most are happy.  The others?  The small minority?  They'll accept it.

Let's break for lunch.

But governor ... it was a meek voice from a staffer, sitting in the back of the room.

But will they?

Governor:

Will they what?

Staffer:

Will they accept it?  At some point, even the most patient of people will act / react, particularly if they tire of hearing "they should pay their fair share", knowing they already pay a vastly unfair percentage!

Let's suppose there is a tipping point - an analytic and moral tipping point.  We may have reached it.  And if we have, these people are going to leave.  Do you know what that means?  If they leave, then there will be less tax money coming in.  And if we already need to collect more, we'll need to collect more "more"!

Governor:

Trust me, son.  They'll accept it.

Staffer:

I'm just saying, Sir, you're setting us up for a viscous cycle.  If just a few people leave, they take with them a lot of money.  To make up that amount of money, you have to tax at a higher rate a lower tax bracket, which has many more people.  They're not going to be happy, either.  And if a few of them leave, you'll have to tax at a higher rate an even lower tax bracket, which has even more people ... and so on and so on.

Governor:

Trust me, son.  It'll work.  It has to work.