Tax the Rich, the Rich Leave

0

I once worked in a city that imposed a special 1 percent tax on earnings. Even if you lived in the suburbs beyond the city limits, you got dinged for 1 percent of your earnings for the privilege of working in the city.


Many of my colleagues lobbied the boss to work from home. If you asked them why, they recited the usual benefits of working from home, then they often leaned over and whispered, “and I won’t have to pay the earnings tax.”


It was interesting to see how a seemingly small tax had a big effect on behavior. There’s something galling about being singled out to pay a tax, even a small one.


So I was not surprised last week when directors of the Valley Industry and Commerce Association voted to oppose Proposition 82, the Preschool for All Initiative, largely on the basis that the special tax to pay for preschools singles out the wealthy, and may provide one additional reason to chase them out of California.


VICA was careful to point out that it praised the concept of putting 4-year-olds in preschools. After all, kids who get a good start in school are more apt to graduate from high school and go on to lead productive lives.


But VICA, along with several other economic development groups, is opposed to the way the preschools would be financed. The initiative calls for a special 1.7 percent tax on individuals who earn more than $400,000 a year, or joint filers who earn more than $800,000.


“This is a quick way to convince our wealthiest citizens, and in some cases, employers, to leave the state,” said VICA Chairman Robert Scott.


Sure, the wealthy can afford it, but there’s something galling about forcing certain people to pay a special tax.


Actually, maybe not all could afford it. Mel Kohn, the vice chair of VICA and a certified public accountant, pointed out that the tax would hit small businesses that are Subchapter S corporations, “the ones that drive our economy.”


But would significant numbers of small businesses really leave the state if they were dinged another 1.7 percent? “There’s a point where all businesses that are not captive (to the state) will look elsewhere,” Kohn said. After all, high-tax California is surrounded by low-tax states.


A study last year by researchers at the University of Michigan and Williams University concluded generally that when a state targets the wealthy for tax increases, the state loses some wealthy citizens. Every 1 percentage point increase in estate tax rates resulted in a 1.4 percent to 2.7 percent decline in the number of federal estate tax returns filed in that state.


Granted, that study focused on estate taxes, not income taxes, but the concept is the same: Seemingly small taxes can have a big effect. If people feel singled out for a tax, they’re more likely to move.


Tax policy is pretty simple, really. The more you tax something, the less you get of it. The more you subsidize something, the more you get of it.


So if voters decide in June to tax the wealthy to pay for preschools, California likely will have fewer wealthy people.



*Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected]

.

No posts to display