California’s Dreaming: Wealth Tax Proposal Joins Tax-the-Rich Parade

California’s Dreaming: Wealth Tax Proposal Joins Tax-the-Rich Parade

The last time we spoke, we talked about California Democrats’ plans to kick the state’s top-tier tax rate up to an all-American high of 16.8%.

The wealthy targets of this big squeeze must wonder why CA is always aiming to top everyone in pocket-picking the affluent. We reckon there’s some nervous spritzer-sipping happening in Palm Springs and LA this summer.

Wait a second and you might see some of that fizziness spraying out their noses, because when they read our blog, they’ll learn about the newest state proposal, which aims to introduce America’s first-ever wealth tax. Mind you, the idea isn’t exactly new: the Greeks invented it some 24 centuries ago, if memory serves me.

This is no retread movie meme: we really do talk this way. For my family – Constantinople Greeks asked to leave Turkey a century ago after we failed at, you know, reconquering the joint – memories of Byzantium are recalled as if we’re discussing pre-DH baseball. It was a while ago, but we remember it well. California can’t pull any stunts that our ancestors didn’t use to torment their own subjects many moons ago.

The practice in question is eisphora: an extraordinary tax on the assets of wealthy citizens. Athens may have pioneered it – they claim every invention, the snobs – but it was likely standard procedure whenever a polis was under stress, particularly war. In recorded cases, the eisphora was only enacted with consent, with the rich motivated by patriotism, religious or civic duty and fear of the mob, who might be manhandled into action by duplicitous politicians. Democracy, as no doubt you’ve worked out, is a Greek word.

In a distant country that occasionally lays claim to California itself, based on short-lived historical episodes and what we must characterize as dreamin’, a similar proposal was floated this summer by that nation’s leader, Vladimir Putin. The Russian president proposed a wealth tax to provide for children suffering from rare diseases, an underprovided minority uncovered during the coronavirus pandemic. Putin wants taxes raised on anyone earning more than RUB5 million ($70K) a year, and hopes to draw an additional $850 billion into the state budget through this scheme.

Mr. Putin underlined his plans with a warning: “These funds must be protected from any other use.” Familiar words to Russia observers, they habitually suggest this time, no stealing. We think Putin’s caution should apply to the proposed California measures, too, because if outright graft is not to be feared, misappropriation certainly is – both monetary and political.

In supporting a California wealth tax, Democratic legislators mention the enormous deficit racked up during the pandemic, but more generally, their arguments sound ideological and socially or politically motivated. Their keywords are ‘economic inequality’.

A sound argument for a wealth tax is that in fiscally strained times, the rich can afford to pay up. Ultra-wealthy spokespeople have been found worldwide, opining their support for a levy. But what about income disparity and wealth concentration? Would tapping this new revenue source actually improve the lives of blue-collar Californians? This is the forever question when discussing state aid programs and the taxes used to fund them.

As pondered in our earlier piece, the wealthy might wonder why they’re in the crosshairs again. The enormous concentration of wealth among the top one percent in America – they hold ~40% of the total – is an oft-cited factoid. But consider this: Forbes reports (August 17, 2020): “Even before any proposed changes, California’s top 1% of income earners already pay most of the state’s personal income tax revenue (a whopping 46% in 2016). The top 5% accounted for two-thirds of personal income tax that year.” At the risk of conjuring up Leona Helmsley’s wrathful ghost, it appears the rich really do pay taxes.

Still, we ask: do the rich need to pay more right now to cover the coronavirus bills? Likely so, in our view, but we wonder: why are left-leaning politicians drumming up support via class anger, when practicality and fairness should suffice?

Demagoguery – you know where the word originates, and likely identified the shared root with democracy – is ever with us, and the rich are good targets, even for politicians dependent on their contributions and – prepare to restrain an astonished gasp – very wealthy themselves. We know the game, but this time things are shaping up threateningly, with a tough trajectory ahead for big earners, depending on how the November elections play out.

Frankly, I believe the affluent brought this situation on themselves. Consider the case: in late 2008, I worked in the equity research department of a bigtime Western bank in Moscow. We were prepping to fire Tanya, our 19-year-old superstar and seven-months-pregnant admin. The financial crisis was roaring in our ears and cost cutting was on the table.

I wasn’t happy and since the responsibility wasn’t mine, criticism came easily. My boss and our chief economist, who held the ugly duty, fell under my guns. “If you richy-rich guys would cut 5% off your bonuses,” I barked, employing doubtful, possibly fanciful math, but righteous principle, “we wouldn’t have to fire Tanya. Axe a millionaire, not 20 fifty-thousand kids.”

I saw the cold panic and knew their minds: ‘Lose 5%! Do you know what it costs to educate a kid in Switzerland?’ The wealthy often tie themselves up in financial Gordian knots, it is true. In my family, the Alexandrian image guides us to simple solutions – not so for the ethnically-varied rich. In their fearsome reasoning, the demos – we commoners – have less to lose, so we don’t feel the pain as acutely. In this, they are regrettably mistaken.

I warned them – a rather hypocritical oracle garbed in indigo wool finery – to address the silent elephant of income equality themselves, lest one day the rabble rousers should seize the issue. This really occurred; I really said these things. It had been coming for years, and my best source, as an infamous movie character once declared, was the New York Times. I didn’t need Zeus to guide my oracular pronouncement.

No one did anything, at least as far as I know. One thing we can never recover is time, and today it may be too late to avoid the political avengers.

The proposed California wealth tax only levies 0.4% on citizens with a net worth of over $30 million, and is less concerning to us than the state’s recent income tax proposals. The problem is the principle: no other US state has a wealth tax, and neither does the federal government – likely with good reason, as international experience suggests the technique is counterproductive and can actually reduce revenues. If the motivation is purely political, though, that practicality may not matter to the bill’s supporters. The usual suspects, as they are perceived, should prepare for the pain.

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