California Hopes to Tax Its way Out of Austerity

My union, the California Federation of Teachers (CFT), heads a coalition that proposes taxing millionaires to raise an estimated $6 billion annually. The article Act now to put Millionaires Tax on the November Ballot (California Teacher, Nov-Dec 2011, V.65, No.2) describes how the proposed "ballot measure will tax individuals earning $1 million per year an additional 3 percent and those earning $2 million or more per year an additional 5 percent." Three competing measures to raise taxes are also on the ballot but this is the one that focuses on taxing only the rich, and, as of February, 2012, is the most popular. "Under the CFT measure, the typical (italics mine) California taxpayer will have no increase in income taxes."

In late December, 2011 I sent an email to CFT President Josh Pechthalt, asking him to show me the numbers. Do we have enough millionaires in California to raise an additional $6 billion? I received no reply.

Assuming the CFT's math is correct, what is the likelihood the new tax will raise $6 billion, solving most of California's budget problems? Let's take a look at the history of other states that have tried the same thing.

Maryland reported only a slightly lower level of millionaires filing after they adopted their tax. The controversy over whether taxing millionaires drives them out is updated here.

Stanford professor Cristobal Young examined New Jersey tax revenue, finding that most of the wealthy don't leave when taxes on them are raised. However, he also said the millionaire tax make state budgets more sensitive to the business cycle.

This is particularly true in a state like California that tends to have deeper recessions than the rest of the country. States should either bank a significant portion of their millionaire tax revenues, or tie the millionaire tax to the unemployment rate. So, when the unemployment rate rises above average, the millionaire tax is triggered, and when unemployment falls below average, the millionaire tax turns off. This would do a lot to help stabilize state budgets.

Since politicians, not academics run the state, it is quite unlikely that California would bank a portion of their millionaire tax revenues or turn off the tax during boom times.  Instead, the State bureaucrats will  keep the tax permanent, raising it even more during recessions. This cycle can't continue forever. Eventually the wealthy really will leave--less millionaires will stick around to be taxed.

Updated, February 25, 2012 and July 8, 2012

Social Unrest: Britain and Israel

Both Britain and Israel are in the news because of social unrest--British mobs continue to throw Molotov cocktails, set fire to cars and shops, loot smashed storefronts, attack police and innocent bystanders, steal, and commit murder.

The left blames the rioting on disenfranchised youth responding to government austerity programs. The right blames the social unrest on socialism--bad behavior should be expected when class warfare is encouraged and people expect to be supported without having to pay for it.

In Israel thousands continue to demonstrate in tent cities, calling for social justice:

Protesters are uniting over the high costs of housing, rearing children, fuel, electricity and food but the dominant slogan has been: "The people demand social justice."

A greater percentage of Israelis than British are involved in their respective protests, but there is much less violence in Israel. Like Britain, Israel has a large middle class as well as rich and poor, and Israel had a socialist past. People in both countries look to the government for a solution to their problems. Before the UN declaration of statehood, Britain controlled the area and many Israeli institutions are based on a British model.

Why then are the Israeli protests peaceful? I believe there are a few reasons. First, most Israelis are not religious but are still taught Bible and ethics in the primary grades of school. Second, almost all Israelis, men and women, have served their country, creating a population devoted to the state of Israel and bringing into society a general feeling of unity among the citizenry. Last, I believe Israeli society does not break down as neatly, as it once did, into the earlier fault lines of religious versus secular, Ashkenazic versus Sephardic, and Arab versus Jew. Britain, on the other hand, must still contend with a much more heterogeneous society--diverse peoples brought from 200 years of empire.

Postscript: The Israeli daily Haaretz saw the Israeli protests as predominantly a middle class affair. Predictably, the left-wing paper looked at little except class and race divisions. Link here.

Postscript late 2012: The European left and the Jewish problem here.