
Calif. Wealth Tax Proposal Likely Faces Constitutional Challenges - brewdad
https://www.law360.com/tax-authority/state-local/articles/1305258/calif-wealth-tax-proposal-likely-faces-constitutional-challenges?nl_pk=c77c92e6-f8f8-4382-aa3a-3f2fb4bc4021&utm_source=newsletter&utm_medium=email&utm_campaign=tax-authority/state-local
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todd8
Four of the twelve the homes on my little street here in Texas are owned by
people that used to have substantial businesses in California. They relocated
to Texas to escape California bringing hundreds of jobs with them.

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zxcvbn4038
The state of New York is also known for pursuing high value individuals after
they leave the state and trying to tax them.

[https://www.cnbc.com/2019/03/08/tax-collectors-chase-rich-
ne...](https://www.cnbc.com/2019/03/08/tax-collectors-chase-rich-new-yorkers-
moving-to-low-tax-states.html)

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bwb
There are so many easier ways to do this, starting taxing dividends and other
income progressively and at normal tax rates. I don't get why they are even
trying this, it creates massive problems and is not a solution.

As well as tax inheritance at 25% or progressively.

~~~
0xfaded
A wealth tax directly targets wealth inequality. No other tax can do that. It
is also extremely predictable, as wealth doesn't necessarily disappear when
the economy has a downturn. You need a war to destroy wealth.

Wealth lasts for generations, and you don't pay inheritance taxes on family
connections or a top tier education. New taxes that make the accumulation of
wealth more equal, i.e. progressive income taxes or capital gains as income
taxes, will not erode the existing wealth disparity within our lifetimes. Just
look at how the policies up until the 80s resulted in white Americans owning
all the property, which subsequently appreciated due to monetary policy.

If wealth inequality is a problem, which I believe it is, you should tax
wealth because it directly reduces the gap in absolute terms.

~~~
dantheman
A good way to destroy wealth is to tax it.

~~~
turtleturtle
Another way would be to print lots of money and redistribute it until you've
satisfied your equality threshold.

~~~
dantheman
The market/price system is the world largest information system. Printing
money distorts that system and make it function poorly and throughout history
has been disastrous.

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neilwilson
When it comes to taxation, only the currency issuer (the Federal government)
can really tax income and wealth denominated in its currency. Currency users,
like states or counties within a currency union really can only tax the land
and property within them. Everything else has a habit of moving to lower taxed
areas. Other states will end up passing laws saying the Californian Wealth tax
cannot be collected or enforced in their area. I'm surprised they aren't
teeing that one up in Texas as we speak - given all that lovely IT business
they could attract.

Purity of tax theory is what ended up as Poll Tax riots in the UK. Eventually
local taxation reverted to property as it tends to once pragmatism and reality
reasserts itself.

California could get what it needs using a volumetric hut tax - unless it
fancies going independent and setting up its own currency.

~~~
belorn
Where does a bank account or stock portfolio reside? Is it at the physical
location of the banks server hall (assuming only a single server is
representing the location of the account), or is it the location of the local
representative bank where the customer is said to be located according to the
bank? Is it maybe the central headquarter of the bank or maybe the location of
the server for the bank online interface where the customer interacts with his
account? Alternative, can it be the registered address of the customer, or
maybe the actually location for where the customer physically resides.

It seems reasonable that a argument can be made that property exist in one of
those places rather than none. Maybe the Federal government should simple
dictate where that is and then let local government handle the actually
taxation.

~~~
bwb
It is done where the person has a tax residence.

The USA is one of only 3 countries to tax you no matter where you live. Which
is really painful for Americans not living in the USA. They need to fix
this...

The rest of the world taxes you as part of a territorial system, ie, where you
live and have tax residence.

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vmception
paywall, details? curious about which constitutional aspects they look at

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CryptoPunk
Do the proponents of these heavy tax burden schemes think the benefits of
lower wealth inequality and higher extraction rates will outweigh the loss of
incentive to work/invest, allocation efficiency and capital (from more capital
flight and less capital influx)?

~~~
jdhn
Yes, they really do.

~~~
CryptoPunk
Even the difference between 1 and 2% per capita GDP growth per year is the
difference between per capita GDP growing 35% and 82% over 35 years.

It's hard to imagine the benefits for the masses of an additional 47% in per
capita productivity growth not outweighing the benefits of the higher tax
rates on the rich.

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exabrial
What does the California government need this for? Their budget is insane
already. Seems like cleaning house is the first thing you should do.

~~~
jfengel
"Insane" how? Its budget is $5,430 per person, 33rd in the nation. The highest
is North Dakota at nearly $20k per person. California falls between Nebraska
($5,024) and South Dakota ($5,575)[1].

It's big because it's a big state. If it were a country, it would be in the
top 50 in the world by population, and 5th by GDP. It's got issues of its own,
like any other large organization, but there's nothing particularly out of
line about its budget.

They're doing this not because the budget is in deficit (it was going to be in
surplus this year, before the pandemic, and had been in surplus for a while)
but because it wants to shift the burden of its budget to those with wealth
(and away from the middle class, especially the lower-middle-class). It may or
may not be a good way to do that, but it's not because it's desperate for
money. Quite the reverse: it's got so much money that it gets to choose how it
funds itself.

[1]
[https://en.wikipedia.org/wiki/List_of_U.S._state_budgets](https://en.wikipedia.org/wiki/List_of_U.S._state_budgets)

~~~
ISO-morphism
Fun fact, North Dakota is also the only state in the US to have a state-owned
bank[1]. Also throw in a grain elevator/flour mill for good measure[2].

[1]
[https://en.wikipedia.org/wiki/Bank_of_North_Dakota](https://en.wikipedia.org/wiki/Bank_of_North_Dakota)
[2]
[https://en.wikipedia.org/wiki/North_Dakota_Mill_and_Elevator](https://en.wikipedia.org/wiki/North_Dakota_Mill_and_Elevator)

------
henriquez
It’s also unethical. Taxing people based on how much money they have left over
after paying all of their other taxes is just wrong, regardless of how much
money the person has. As far as I know there’s no basis for this ever having
been done in human history. Not to even mention California’s proposed plan to
keep collecting taxes after the person flees the state. I can’t imagine this
bill has a chance of doing anything but helping useless politicians pander to
their disaffected political bases.

~~~
vlovich123
> As far as I know there’s no basis for this ever having been done in human
> history

Two seconds of googling. The Wikipedia article for progressive taxation[1]
suggests that the Roman Republic had a form of wealth tax:

> The tax rate under normal circumstances was 1% of property value, and could
> sometimes climb as high as 3% in situations such as war. These taxes were
> levied against land, homes and other real estate, slaves, animals, personal
> items and monetary wealth

Then we have the wealth tax Wikipedia article itself[2] that lists 8 instances
in recent history of wealth taxes.

Then you say:

> Not to even mention California’s proposed plan to keep collecting taxes
> after the person flees the state

How is this any different from how taxes are owed today? I'm pretty sure all
back taxes you owe a state remain even if you move states. Otherwise you could
just rack up a huge tax bill & move states to escape.

Even federal US tax liabilities are applied on world wide income & has
treaties with many countries to enforce these laws for expats.

> It’s also unethical. Taxing people based on how much money they have left
> over after paying all of their other taxes is just wrong

Aside from stating a personal tautology you haven't really elevated the
discussion much & then everything else flowed from this premise rather than
evaluating the argument on its merits. I'm sure there's a compelling argument
against this that could be made against a wealth tax independent of
constitutional issues, but you haven't made it.

[1]
[https://en.wikipedia.org/wiki/Progressive_tax](https://en.wikipedia.org/wiki/Progressive_tax)
[2]
[https://en.wikipedia.org/wiki/Wealth_tax](https://en.wikipedia.org/wiki/Wealth_tax)

~~~
haram_masala
The problem with a wealth tax is that it's essentially retroactive. Instead of
taxing income and capital gains at the time they're accrued, you tax them
later - long after the individuals who accrued them have had the chance to
make rational decisions based on that tax rate. This seems inherently unfair
to me, a form of bait and switch, especially combined with the intention to
hunt down former California residents up to a decade after they've left the
state (thereby further denying them any opportunity to make rational
decisions).

~~~
vlovich123
How is it a bait and switch? Seems like that kind of framing would apply to
the introduction of any new tax which seems immature to me.

I do hope the 10 year thing takes into account how long you’ve been in the
state and how much you earned within the state.

Remember. You’re only getting taxed on the amount over >30mil in assets (first
30 million isn’t taxable). That’s quite a lot of money before a very small tax
begins to be levied.

I do hope there’s also allowances for income tied up in illiquid investments
(eg private business investments). I would also worry about taxation on net
worth that hasn’t been realized (eg private company that does a valuation that
suddenly puts you over the 30 mil threshold). These seem like important
nuances that could quickly torpedo any benefits.

~~~
sokoloff
What can look like a very small tax is not at all small when applied
repeatedly (annually).

As an example a popular “Just two cents” plan takes a third of the value of a
taxed base in 20 years and by 35 years, the government has received over half.

~~~
thoughtstheseus
Does your example assume the asset will grow in value? Wealth taxes get big as
they compound, but that also shows the compounding value of assets.

~~~
sokoloff
That is simple math assuming no change of the taxed wealth value (which could
go up, down, or stay the same).

IMO, "small" wealth taxes "get big" because they take repeated bites at the
same apple.

Government take [via wealth tax] in the example above is the result of 1 - (1
- taxrate) ^ years.

    
    
      1 - (1 - 0.02) ^ 20 = 0.3323 ; (20 years => 33%)
      1 - (1 - 0.02) ^ 35 = 0.5069 ; (35 years => 51%)

~~~
jdlshore
Assuming no change to taxed wealth value is a huge assumption. A better
baseline assumption would be a conservative mix of index funds, IMO, which
would result in 3-4% return IIRC.

~~~
sokoloff
Assuming 3.5% growth (the midpoint of your proposed range) on all funds, the
government share after 20 years is 27.3% and after 35 years is 36.7%.

[https://docs.google.com/spreadsheets/d/1_k6sFrBAjwpJbXKHmpNA...](https://docs.google.com/spreadsheets/d/1_k6sFrBAjwpJbXKHmpNAbEIfewuUCfEt3pNS5ksqDOU/edit?usp=sharing)

~~~
jdlshore
Okay, this is interesting. Let's play out a scenario.

Take a 45-year-old who's worked hard and gotten very lucky. They've earned $50
million from an IPO and are retiring early. How much money can they spend per
year, before and after the wealth tax?

Just to keep it interesting, I'm proposing this scenario _before_ running the
numbers.

Assumptions:

1\. Death at 90, no money left over.

2\. Money invested very conservatively with 3.5% return.

3\. No income, so no income tax or capital gains tax [1].

4\. Inflation is 1.76% (average of last 10 years [2]).

5\. Wealth tax is 0.4% applied to wealth in excess of $30mm.

 _With_ the wealth tax, our lucky devil can spend $1,509,000 _every year_.
That's inflation adjusted, so when they turn 90, they're spending $3.3mm per
year.

 _Without_ the wealth tax, they can spend $45K more: $1,554,000 per year
(inflation adjusted).

I don't know about you, but if I had $1.51mm in spending money per year, I
wouldn't be sweating the extra $0.05mm. It seems like a reasonable cost to me,
and _very_ low compared what you'd pay in income tax.

[https://docs.google.com/spreadsheets/d/1fV9pip51Z-qqRUG3pDEc...](https://docs.google.com/spreadsheets/d/1fV9pip51Z-qqRUG3pDEcSIcNUKPjLDNrxYq2Gvzv4ow/edit?usp=sharing)

[1] I may have misunderstood how capital gains are taxed when you have no
other income. I don't think it detracts from the overall point, though.

[2] [https://www.usinflationcalculator.com/inflation/current-
infl...](https://www.usinflationcalculator.com/inflation/current-inflation-
rates/)

~~~
sokoloff
Good math. Note that this scenario is using the 80% lower CA wealth tax
proposal, not the "just two cents" wealth tax that was proposed during the DNC
primary race earlier this year that I was using (as openly/clearly disclosed).

~~~
jdlshore
Sorry, I missed that. I think it's a bit disingenuous to use a year-old
proposal from a failed primary candidate, though, rather than the actual
wealth tax under discussion.

However, if we were to use Warren's proposal, our lucky millionaire would be
unaffected, because it doesn't kick in until $50mm. (A happy coincidence.)

If I run the numbers again, using a _very_ lucky millionaire with $100mm in
assets, it comes out as follows:

1\. Warren wealth tax: $2,613,000 yearly spending power

2\. CA wealth tax: $2,939,000 yearly spending power

3\. No wealth tax: $3,104,000 yearly spending power

Warren's proposal is much more aggressive about leveling wealth inequality,
especially considering that it jumps to 6% for billionaires. I'm not convinced
it was a serious proposal, though, given that it was part of Warren's campaign
rhetoric. I think she's serious about a wealth tax, but I suspect the specific
proposal was a starting point in the bargaining process—an attempt to shift
the Overton window, if you will—not the expected outcome.

