By Kerry Jackson and Wayne Winegarden, Pacific Research Institute
California Assemblymember Alex Lee should have studied Europe’s experiences before introducing his wealth tax proposal. Had he done so, he never would have introduced Assembly Bill 2289 that, if adopted, would impose 1% annual tax rate on couples with net worths exceeding $50 million and a 1.5% annual rate on couples with net worths exceeding $1 billion.
In 1990, 12 European countries taxed wealth; today only three do. The nine nations that abandoned wealth taxes did so because they are economically destructive, difficult to administer, and fail to raise sufficient revenue.
When considering a wealth tax, it is important to dispel the myth that the rich do not pay their “fair share” of taxes. According to the nonpartisan Legislative Analyst’s Office, taxpayers whose returns exceed $1 million comprise 0.4% of all returns filed but provided 39.6% of income tax revenues. Since these same taxpayers accounted for only 19.4% of adjusted gross income, California’s income tax system is clearly progressive.
Those targeted by AB 2289 likely pay the state’s highest personal income tax rate at 13.3%. Add in federal income taxes, and they pay 50.3% of their earned income to Sacramento and Washington. Even without a wealth tax, California’s “rich” disproportionally fund government functions.
By design, the wealth tax will further increase this tax burden. Should the affluent abandon California because of the greater drain on their assets – and history shows this will happen – they will take with them the dollars needed to fund schools, public safety, health care, and other public services utilized by Californians. Investment in the state economy, which creates jobs and wealth across all classes, should also decline.
This won’t hurt the moneyed residents who leave. They will be fine. The damage will be felt in the lower and middle classes.
Simply put, confiscatory tax rates are economically destructive. As we documented in our study on California’s outmigration problem, the outflow of people, businesses, and wealth from the state is troublingly large and accelerating. It is why for the first time in history California lost representation in Congress. A massive tax hike on the rich would further incentivize them to leave, costing California billions in revenues.
This is exactly what happened in France due to its wealth tax. Before its wealth tax was repealed, France lost 42,000 millionaires between 2000 and 2012. The loss of the tax base also means that the revenues raised from wealth taxes are inevitably disappointing. Acknowledging the migration incentives of the wealth tax, the bill would tax wealthy people’s assets, at a declining rate, for years after leaving the state. The legality of such a tax is questionable and there will likely be years of legal proceedings hashing out this question.
The administrative difficulties are also problematic. Multi-millionaires and billionaires hold most of their wealth as assets. Some, such as stocks and bonds, will be easy to value. Many others will be difficult to appraise. How do you value the worth of a privately-owned business that is not publicly traded? How about a ranch that has been in family for generations?
Accurately administering a wealth tax requires Sacramento’s bureaucrats to precisely calculate the worth of these assets. This will require a huge increase in the number of tax administrators.
It is also unlikely that the target of the wealth tax will remain on just a few. The history of the personal income tax demonstrates that, ultimately, the taxes are applied to everyone.
If Sacramento heeds the lessons from Europe, then the Assembly will reject AB 2289 as a counterproductive proposal that will accelerate the growing outmigration of residents and further weaken our economy.
Kerry Jackson is a Fellow with the Center for California Reform at the Pacific Research Institute. Wayne Winegarden, Ph.D. is a Sr. Fellow in Business and Economics and Director of the Center for Medical Economics and Innovation at the Pacific Research Institute.