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California Is Proposing A New Wealth Tax On The Mega Rich - But Will They Stay To Pay It?

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The rich must pay their "fair share". Get ready to hear these words almost on a daily basis as we enter the US election season.

The issue of taxation will always be a pertinent issue especially for a country that was founded on the unwillingness to pay extra taxes. However, never in recent history has it been more relevant than today as the US economy begins to recover from a nationwide lockdown in response to the Coronavirus pandemic.

The recovery is going to be a massive job as during the lockdown period the US economy saw joblessness claims rise to levels that not were not even present during the Great Depression.

With jobless claims skyrocketing and taxation revenue drying up, Californian Democratic representative Rob Bonta has proposed a new tax as a solution to the state's financial problems.

More Taxes, More Problems

As is usually the case with politicians who want to raise tax revenue, they believe that there is a linear relationship with tax revenue and tax rates, i.e. the higher the rates the more money you bring in.

Even the most casual observer of history would conclude that this is not the case. As tax rates go up, those wealthy individuals start moving their assets to low tax jurisdictions or if need be they themselves leave.

This concept was understood by prominent economist Arthur Laffer, who in the 1970s, formalised a more pragmatic approach to taxation in what was later was known as the Laffer curve. The principle essentially stated that in the right circumstances, lowering taxes would stimulate more economic activity which would in turn lead to an increase of tax revenues.

This way of thinking has undoubtedly been put on the back burner as California's administration pursues this aggressive strategy, which doesn't go after people's yearly income but actually goes after their total net worth.

You Can Run But You Can't Hide

For the amount of gesticulating of the previous section you may think that the proposed Californian tax increase is a gargantuan figure which would impoverish every multi-millionaire in the state.

It's 0.4% on anyone whose net-worth is over $30million.

Doesn't sound much right? Just a minimum of $120,000 which is nothing for these ultra-wealthy people. Why would anyone leave over this?

We have seen on a number high profile billionaires that reside in California sign up to "The Giving Pledge", an initiative started by Warren Buffet and Bill Gates, where participants aim to give a majority of their wealth away through philanthropy. It would seem strange to see these people leave for what something they would consider to be pocket change.

The exodus that is being anticipated is not a direct response to this specific proposal but to the ever increasing and over burdensome Californian taxation system that is making many nervous. With California already having the accolade of the US state with the highest taxes (and by a long way), it seems many believe that Democratic dominated administration is only going to get worse before it gets better.

For the first time in its history the Golden State is proposing to retroactively tax its citizens, meaning regardless of whether you still reside there you could be liable for Californian state taxes - for up to 10 years!

Is this really the type of environment that is conducive to business and economic activity?

If this is the type of legislation that is being proposed why would you risk it? Why not go to another state where you pay zero state incomes taxes? The more desperate the legislators become the more likely your tax liability is going to rise significantly.

Has The Exodus Started Already

California relies heavily on its richest citizens, where in 2016 the top 1% paid nearly half of the state's income taxes and the top 5% were response for two thirds of the revenue collection.

New York City Governor Andrew Cuomo has seen first hand the effect a hostile environment to those who are paying the most tax can do. He has pleaded with many of the city's richest residents to return after the pandemic after reports have suggested that many are putting off going back to the Big Apple after its handling of the pandemic and the fact that the high taxes are now not worth staying in what has become a rapidly declining city.

Back in California, UFC commentator and podcast legend Joe Rogan has just completed a deal to move his show to Spotify in what was reportedly a deal around $100million.

It therefore comes as no coincidence that he publicly announced that will be leaving the blue state in favour of Texas. He maintains that the reason for the move is because it will allow him to travel the country easier. The fact that Texas don't charge a personal income tax was an afterthought am sure!
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