Do the rich prefer higher taxes?

According to The Wealth Report - WSJ.com, the Obama victory margin came from two income groups: those earning less than $50,000 annually and those earning more than $200,000. John McCain won among those in the middle, from $50,000 to $200,000. This success among the high earners is somewhat surprising, given Obama's promise to sharply raise taxes on this group.

The Journal speculates the wealthy may have discounted the tax threat, knowing that it is hard to raise taxes during a recession, or they may really agree with Joe Biden and believe that it will be more patriotic for them to pay more.

I suspect the answer is more subtle. Like Warren Buffett, many of the rich like to say that they favor higher taxes. All the while they know that, whatever happens to the tax code, they have the sharp lawyers and accountants to find ways around any tax increase. Buffett has famously defended retention of the federal estate tax, while publicly sharing his own estate plan that eliminates death taxes for his own estate (through transfers to the Gates charitable foundation.)

The best example of a failure to successfully tax the rich was the luxury tax on yachts and other high-priced items, enacted in 1990 when Bush I was forced to break his "no new taxes" pledge. The projected revenues for 1991 were $31 million. Just $16.6 million was collected. Obviously, the rich simply stopped buying boats. (Revenue estimators are barred from taking even obvious behavioral responses into account.) An estimated 7,600 jobs were destroyed in the boating industry, according to a later analysis by the Joint Economic Committee, with a short-term cost of $24.2 million in unemployment benefits and lost income taxes. The long term cost was the loss of the American boat building industry, which never recovered, even though the disastrous luxury tax on yachts was quickly repealed in 1993.

It doesn't take much time for a toxic tax to do permanent damage.

In an ironic coda, in 1999 Rep. Patrick Kennedy proposed a 20% tax credit for purchasers of American built yachts. That would be $200,000 for the buyer of a new $1 million boat. The credit was capped at $2 million per taxpayer. We don't know if the tax incentive would have helped the boat builders, because it was never enacted.

Interestingly, in its guide to surviving the Obama tax hikes, the Wealth Report recommends "Sell. Sell. Sell." before the end of the year. How much of the selling pressure on stocks during September and October came from people trying to lock in a 15% tax rate on their remaining capital gains? Perhaps more than we think.

As evidence of the widespread anticipation of higher taxes, my son, who is much more a football fanatic than I am, told me last night that the agents for high-dollar players are already working to get bonuses paid during this year, to avoid the higher tax rates they expect next year.