Economic Folly, California Style

In recent years, a state once famously lauded for
being a place of undreamed of prosperity not only
throughout the United States but in many other
countries, resulting in many people moving to
California from these places, has done a shocking
180 degree turn through raising existing taxes
through the ceiling and creating a truckload of
new taxes, all to the pain of individual and corporate
taxpayers. The cure for the pain felt by both has been
to pack up and leave California for places where
prosperity is not punished but rather is encouraged.
Liberals, both in and outside of California have
claimed that taxpayer migration is not a result of
the increases in the quantity and the rates of taxation
there, nor is it at all harmful (?!) to state tax revenue.
They also seem to think that the hard-earned money
of well-to-do Californians would be better used by
the state government in terms of doing more
economic good for everyone there, a common
delusion among left-wingers. Some even think that
California should take a page from far left-wing
Democrat candidates for the presidency, Senators
Bernie Sanders and Elizabeth Warren and also go
after the assets of the wealthier people of that
state (assets such as investment portfolios, bank
accounts, etc.).

However, Stanford economists Joshua Rauh and
Ryan Shyu studied how upper-tax bracket income
earners responded to a 2012 referendum,
Proposition 30, wholeheartedly supported by Democrats
that raised the top marginal rate on California taxpayers
with over $1 million in income to 13.3% from 10.3%.
Additionally, the top rates of individuals earning over
$250,000 also increased between one and two percentage
points. The Stanford study discovered the inevitable
result; a sizeable uptick in the rate of departure by
taxpayers with $5+ million in income following the
Prop. 30 tax increases, and a similar outflow for earners
in the brackets between $2 million and $5 million.

Recently reported on by the Wall Street Journal,
the point that all this makes is that the likelihood of
a wealthy resident of California moving out of state
increased by approximately 40% after Prop. 30. And
after the recent federal tax reform which has rendered
state and local taxes no longer 100% deductible, the
bite of the increased tax burden has been more fully felt
by California's wealthier residents, resulting in an
increased incentive to move to a lower-tax locale.

Other consequences of the Prop. 30 tax hikes revealed
by the study include high earners responding to them
by, among various strategies for reducing their tax bills,
simply working less, that is to say, reducing billable hours.
Some other big earners deferred compensation.

In short, the study estimates that migration out of California
along with taxpayer behavioral responses have taken away
45.2% of the expected revenue gains California was counting
on from the dramatic tax increase on top earning taxpayers.
This shoots a huge hole in the longtime argument of liberal
economists that the wealthy don't care about marginal tax
rates and increasing the top income tax rate to 70% will
neither affect revenues nor incentives to work. Moreover,
America's wealthy have cared greatly about marginal tax
rates for decades, at least since the 1940s when they simply
stopped paying the higher taxes on their earnings which
were just beyond the top marginal tax line and the federal
government, in the middle of fighting a war and later
trying to return the country to and maintain a peacetime
footing, merely gave these folks and their businesses
a wink and a nod. Uncle Sam knew that the economy
would have been thrown into some instability if he were
to have gone after the biggest individual and corporate
earners to shake loose some much-needed revenue with
aggressive tax collecting methods employed by the IRS
and instead let these parties be. This resulted in further
expansion of investing in and expanding businesses,
especially those which made and supplied important
materiel for the war effort, and later Apparently California's
state government hasn't learned anything from our
economic history, if ever it bothered to make the effort;
hence, California's severe economic woes. The top
marginal tax rate in the 1940s? 94%. Throughout the
1950s, '60s and '70s this rate settled back to no lower
than 70%.

In light of this remarkably revealing study, the Democrat
regime in Sacramento should reconsider their eagerness
to further plunder the earnings of their state's biggest income
earners. For one thing, whenever the next recession arrives
these Dems will have to tap into the middle class even more
than they presently do just to pay the tab for all of their
big spending dream programs they have created in the present
boom times once the state's economy goes from boom to
KA-BOOM! And still more wealthy California residents
will flee to states with lower or no income taxes.

But does anyone really think that California's Dem governor
and legislature will heed any of these warnings inherent in
the analysis of economists Rauh and Shyu? As we, my grand
readers, visit here today California's ruling Democrats are
campaigning hard to get a referendum in 2020 to remove
their state's constitutional tax cap on commercial property.
If it is accepted by the state's electorate then Californians
can kiss their private sector jobs goodbye, for businesses
will pack and move just as high income earners currently are,
packing up and taking Californians' jobs with them.

Let's see how that state's Democrat rulers deal with a bankrupt
ghost town of a state. California we have gone, back to where we
started from, la la la, la la la, la la la la, ...


MEM