Is it "unfair" of Californians to impose progressive tax rates?
Yesterday, while still in a relatively balmy part of Alaska, I posted two quasi-defenses of the original "Atlas Shrugged Guy." For background on the Atlas Shrugged Guy and his views, see the compilation here. For the quasi-defenses -- which were more like criticisms-of-critics -- see here. For why I'm describing Anchorage as relatively balmy, see the illustration at right, with conditions just now at our next stop, Fairbanks. (Come on out today, if you're in the vicinity, to hear my wife and me talk about China, while warding off chillblains.) And if you want to see a TSA line in its full cumbersomeness, I invite you to an Alaska airport in the middle of winter, when "take off all your coats, shoes, and other garments" means heaps upon heaps of snow jackets, parkas, fleece, giant boots etc being piled in the bins.
For the moment, here is a set of responses to the longer of the two Atlas quasi-defenses. The defense in question came from a very successful tech-world executive I know. He said that because of the results of California's election one week ago, he was preparing to leave the state. His objection was that the electorate was voting certain benefits to itself -- and asking people like him, at the top of the taxable-income distribution, to pay a disproportionate share (or all) of the cost.
1) Well, it is good to have an informed readership! Everyone on Earth has written in to say that a quote the tech-world reader attributed to Tocqueville, about the way democracies destroy themselves by voting benefits to the majority that the majority doesn't pay for, is a boiled-frog style hoax. If I'd seen the excellent Atlantic Wire item debunking this very quote, I would have mentioned it at the time. If the reader had, he wouldn't have used the quote. He was written back to say that he'd like to have that part of his message corrected, which I'll do when I can.
2) Nearly as many people have written to point out that Prop 30, the California initiative that raised income taxes for top-end taxpayers, also raised sales taxes, which of course have the opposite effect. (They are "regressive" in the sense that their relative incidence burden goes up as income goes down.) I have been away from my native state too long and hadn't paid attention to that.
3) Readers speak. I haven't even opened or read most of the replies on this I see in the inbox. Here is the first set that come across my eyes.
A long statement of the case:
I find the "tech figure" to be disingenuous at best. He lays the blame for California's mess on politicians:
"In a sense the funding shortfall was manufactured. Amidst severe financial paucity politicians chose to budget for everything except education (including new railroad trains and tracks,) then raise the rhetoric of doom in education, proposing this tax on a tiny minority to pay for it."
He is clearly intelligent, and thus he's too intelligent to be unaware that the funding shortfall was manufactured - by Prop 13. When Prop 13 untethered property tax and civic improvement, California became dependent on sales tax to raise revenue. Therefore, he has to be aware that the home that he occupies, and especially, the home that his elder parent(s) occupy, are essentially subsidized by increases in sales tax. You and I are in the same boat - both our parents live in homes whose property value is much lower than it would be in many other states. They see firsthand the advantage of Prop 13. You and I pay the price in increased sales tax revenue.
As an aside, we have the highest sales tax in the country, and the second lowest property tax. Prop 13 shifted the burden of civic improvement from the homeowner, who has a vested interest in civic improvement, to the consumer. When Prop 13 was passed, no adjustment for the revenue loss was made for years - and we have been paying catchup ever since.
Next, the claim that "53.9% of Californians feel that it (education) should be funded by just 1% of the state's families." That is at best a distortion of the facts. Prop 30 also increased the sales tax throughout the State 3.45%.
Moreover, the tech figure speaks of starting "several $500m per year businesses". In order to do so, he would have leaned heavily on graduates from California schools, both secondary and college. You can place the value of an education where you like, but I always like to say that the value of 4 year college can be drawn by comparing the raw cost of an unsubsidized private - like
your alma mater, USC - to that of a subsidized public, like UCLA. USC, raw cost, is $66,928. UCLA, raw cost, is $31,902. [JF note: I didn't notice this the first time through. I am "from Southern California" the region, but have not attended "Southern California" the university.]
Using those figures, California taxpayers subsidize the education of a college student to the tune of +/- $35k per year. That is around $140k per student. It is good business; intelligence is a natural resource to be cultivated, as it is the real currency of a nation. The tech figure must have used hundreds of those subsidized students to build his fortunes. Burt he does not see this as his debt - he sees it as his right. Others subsidize those students - not him.
Adam Smith, who may not have founded "several $500m per year businesses", but had a pretty good idea of capitalism and what is best for it, said, "The expense of the institutions for education and religious instruction is likewise, no doubt, beneficial to the whole society, and may, therefore, without injustice, be defrayed by the general contribution of the whole society. This expense, however, might perhaps with equal propriety, and even with some advantage, be defrayed altogether by those who receive the immediate benefit of such education and instruction, or by the voluntary contribution of those who think they have occasion for either the one or the other." It is a Smithian compromise that Prop 30 sets up - all people contribute, and those who benefit most - like the tech figure - contribute more.
The tone was set in his response to the passage of Prop 63, when he stopped charitable giving in reaction to the passage of a law. He looks to the behavior of others, and that determines his reaction. That is a man with power but no moral compass. If he - or anyone - gives to charity for any reason other than true charity, the gesture is merely the sliding of beads on a forever unbalanced abacus. Matthew 25 does not say "whatever you did for the least of these in relation to a complex personal system of conditional spending related to the fluctuating tax structure of whatever state you happen to live in, you did for me".
So off you go, tech figure. We will create 10 more that look just like you; hopefully they won't act the same.
The basic math. The tone of this note is representative of many I have seen:
I have to say I'm a bit appalled by your Atlas Shrugged defender #2, "a very successful tech figure in California" who has "created several $500M/year businesses." You'd think that such a person would be better at math. Especially since his taxes are such a sore spot for him - although perhaps if he actually understood them, he wouldn't be quite so pissed off.
Apparently he's in the millionaire bracket, which means that with Prop 30, he will:
· Pay 1% more state income tax on $50k ($250k - $300k), or $500.
· Pay 2% more state income tax on $200k ($300k - $500k), or $4,000.
· Pay 3% more state income tax on $500k ($500k - $1 mil), or $15,000.
· Pay 3% more state income tax on everything over $1 million.
That doesn't add up to 30% more taxes - sorry buddy! He frames it in terms of the percentage increase for each bracket, which is not only misleading, but incorrect, since the rate only applies to income that falls within that bracket. He also claims it's only levied on the top 1%, but that, too, isn't true - the rate hikes affect the top 3% of Californians. Also, the school budget issues are not manufactured as he claims - education in California has been in dire straits since the state economy got hammered by Enron. This is a problem that's been going on for years.
I'm not going to say, "good riddance" or any of that. His kind of money goes a long way in California, but it'll go even farther out in the Midwest or somewhere else with a low cost of living. As long as he's happy living in such a place and isn't too interested in starting up any new $500M/year businesses, I say go for it. The education system will miss his money, but at least he won't get to teach anyone here his poor math skills.
I find these libertarian arguments of fascism on taxes deeply misinformed. The guy goes off on Prop 30 temporarily raising taxes on top earners while not mentioning that the sales tax also goes up. So the citizens of a state whose funding for public education has gone down for decades relative to other states for years have chosen to correct that in a manner that doesn't just stick it to the 1%. In a sense the proposition does address issues like income inequality while also acknowledging that we are in this together (everyone including the poor will be hit by a sales tax). And yes I will be likely be hit by both the 1% and the sales tax this year. Progressive taxation is not fascism except in the fever swamp of the "maker" argument: California for years has been a great place for tech companies because the states education system up to the UC system was considered the best in the world. Baffling really when one factor that seems to have been a real factor in why the US was transcendent in the 20th century was that it invested tremendously in education.
Another way to think about: In what way will (other then being peeved) both tax increases impact this gentleman. Literally I bet in no substantial way beyond just feeling that he's being discriminated against for being successful. Notice again the short shrift one sentence liner on education being good followed by complaining about other things in the budget without mentioning any of the benefits he gets from living in California in the first place. It's like the Papa John's going off on about healthcare while not seeming to realize the cost of it will be likely less then 1% of a cost of pizza. That's literally within the float of how much commodities prices cost food companies and yet another guy seems to need to go off on how terrible it is be in business under Democrats
I want to take a moment to respond to the California "high-tech" guy whose letter you posted on November 12 because he says a lot of things that are facially valid but are nevertheless infuriating. His concerns are valid enough -- and I opposed Prop 63 for exactly the reasons he gave -- but in the context of Prop 30 and the current California budget crisis, he's off base.
As an aside, it should probably be noted that the rich consume public service just like the rest of us. He assumes that the services paid for by California's taxes are for other people, not him. This is almost certainly not true. But accepting it for the moment, on to my main point --
I, myself, am a public employee. My own agency has been hit by about a 20% reduction in its overall budget from what it was only four or five years ago. One of the ways that this cut has been absorbed is through furlough days. Because of the furlough days I currently take what is essentially a 5% pay cut from what my income was a few years ago, and when current negotiations are completed I'm almost certain to take an even larger pay cut. (If I don't get laid off, which isn't impossible). There's no difference between a 7-8% pay cut (if I'm lucky and it's not the even larger slice management has asked for) and a corresponding increase in taxes to my take-home pay. My pension -- which is the additional compensation that makes my total compensation equivalent to what I would earn in the private sector -- is probably going to be cut, too. Employees feel a bite in other ways -- bringing in their own supplies because the agency can no longer afford them, etc.
Meanwhile, the agency I work for has reduced services everywhere. Remote locations are being closed down, leaving to long drives for the public just to use our services. Lines are getting longer. Delays are everywhere. And relations between management and labor have broken down, because management wants to minimize the impact on the public and the employees feel like we shouldn't be giving the public more services than they're willing to pay for.
This state of affairs didn't come about because of greed on the part of the "53%." It came about because of greed on the part of the Republicans carrying water for the 1%. State Republicans have not only refused to entertain any tax increase, they've basically refused to suggest any plausible budget. ("Cut waste" is a common refrain, but there's never an explanation of where the billions of dollars can be saved. Education, health care, public safety, and the courts have absorbed massive cuts over the past few years). Schwartzenegger funded the state for years with bonds that now have to be paid off; Grey Davis was booted out by people like your correspondent because he tried to get a minor vehicle licensing fee increase that would have helped and would have had less impact on your correspondent. (Regretting it now, pal?) A shift to a state funding system less susceptible to recessionary impacts is impossible. Prop 13 prevents the state from increasing property taxes and cutting income taxes, which would be a good idea. Republicans in the legislature would refuse to entertain any restructuring of the tax system (say, less income taxes and more sales taxes), which would also be an improvement because it would make state funding fluctuate less. "Base-broadening" of the type discussed nationally would also be a non-starter with the Republicans, who have taken the position that an increase of $0.01 on any person, no matter what it is combined with, is a tax increase and (until this last election) the Republicans had enough votes in the Legislature to block any tax increase, which needs a 2/3rds majority in each House. If your correspondent would have preferred a 1/4% increase in the top rate and increases lower down on the income scale, he needs to take it up with the state Republicans. If even two or three of them had proposed such a solution even six months ago, it would have passed quickly.
Prop 30 (which, by the way, does include a sales tax increase that your correspondent ignored) was literally the only way to add any additional revenue to the budget because people like your correspondent blocked any other means of adding or fixing California's revenue, and increases lower on the income scale wouldn't have passed. Even at that, it's only a 6-8 billion dollar increase, maybe half of the anticipated shortfall for the next fiscal year, enacted only after years of cuts-only fixes. Your correspondent seems to think that a solution to a budget crisis that only impacts people other than himself is fair and a solution that includes a minimal impact on himself compared to the massive impact on everyone else is robbing from the rich to give to the poor even though the problem was largely caused by people like himself and their impossible demands on the treasury that caused this crisis. Nonsense. Schools, health care, public safety, courts -- the 99% have absorbed a much bigger hit than he's taking now already and will absorb a bigger one next year.
Anyway, if your correspondent is still feeling put upon, he should remember, if nothing else, this -- the tax increase he's taking is minimal compared to the tax increase I'm taking. Nobody likes to call the kind of reductions in income public employees have been taking, and will continue to take, tax increases, but like taxes they are a reduction in take-home pay that result in more money to the state, and let me tell you this -- if our next contract only had a 1% reduction in pay, the employees would throw a parade with fireworks Mitt Romney couldn't pay for.
Who says Americans don't pay attention to public affairs? I am about to get on the
flying sled plane to Fairbanks, so I will post this one now, with hopes for more on this and the original Atlas Shrugged Guy anon. For good measure, one more very long response after the jump. Thanks to all. (And I have heard again from the tech exec, with more to come from him too.)
The last one for right now:
I wanted to respond to an issue I have with the most recent comment on 'Atlas Shrugged', from the sympathetic tech owner in California. I think he's looking at information in a vacuum that is absent of history, of how things got to be this way and what was actually on the ballot.
First of all, the major flaw in California is that you essentially require a super-majority in its state legislature to address taxation and budgeting. This is a result of the efforts put in by people protecting the wealthy, but decades back, by a party that figured out if it could endure with a size-able minority, it could restrict the California budget forever, creating massive budgetary issues resulting in further and further cuts with no capacity for correction through tax increases.
So, the reason Prop 30 was put forward is because it was the only thing that could get be approved by the large majority of voters. This is why ballot-budgets are horrible ideas. This is why the California ballot initiative system is broken. But this is also, by the way, ensured by the very people who are now carrying such animus towards voters whose clout they hid behind. It's also not limited to California. We are currently fighting over increasing taxes for the wealthiest Americans. But Bush didn't pass tax cuts just targeted at the rich. The tax cuts benefited the rich more, but he passed them at all levels, because you can't just run on tax cuts for the wealthy. Yet, here we are, surprisingly with the party that pushed for these cuts now having been willing to allow their expiration at all levels as a bargaining chip to ensure they get them at the highest levels, to ensure they prevent cuts.
This is a party strategy, a party whose interests align with the very wealthy. Now, I don't believe your tech owner in California is part of a conspiracy. I think he's responding, however, to the back half of a story. There has been a decades long battle to promote tax cuts, and this has resulted in climbing deficits as governments have kept telling people they can put in less and less and growth will somehow make it that they won't lose out. And when they do lose out, then program after program gets put on the cutting block, particularly those that don't generate revenue. In truth, all of the Bush tax cuts should be rescinded. They should never have been put in place. But now, we're stuck with the prospect of doubling back into recession if we do that. The only thing on the table that both won't destroy the economy and will be politically feasible at the present moment is increasing taxes on the wealthiest Americans, the very Americans for whom these tax cuts were actually created, the very Americans who have gained the most and suffered the least.
You can't look at this long battle, and say 'well, we're being targeted by the selfish' when in actuality, this was part of the bargain, that you could swindle people for decades on lower taxes that truly benefit the wealthiest, that you could make generating revenue through taxation politically unfeasible, and that the people would ultimately be powerless when cuts eventually have to happen, particularly if you predict catastrophe if they did not. This is a long public relations struggle, and frankly, this is the correction on it. Taxes get restored on the Americans who benefited most from tax cuts. This is how the system corrects. If you want a system where everybody puts in, where everybody pays their fair share, well, then don't promote a system which swindles the middle class, the working class and the poor to make a sale for the wealthiest. If we're in this together, then we should, together, be fighting against future across-the-board tax cuts by any party that promises both those cuts and that we will continue being able to pay for social security, for medicare, for education, for mental health and all the services which we take for granted until they are absent. Ronald Reagan, in a later life of public service, ensured that mental health, that basic protection for the homeless veterans of America, would get demolished. This is not a charitable donation. This is part of a basic commitment a country should have to its citizens, particularly to those it has asked to serve. And this fight has repeated itself for years, with the party that advocates tax cuts saying they support the troops until all of a sudden, we can't afford veteran's benefits.
This is not a secret method. This is how it works. And it's all done in protection of the wealthy. And that's not a bad gambit to run. It's pretty effective. But guess what, its results are evident when you look at California. People eventually find out they need services. People eventually want to part with less than they thought they could give up. People eventually pass propositions, and people, like the wealthiest Americans, continue to look out for their own checkbooks when they do. This is what decades of tax cut advocacy gets you. Eventually, people realize they don't want smaller government, and the system finds a new balance, and it's far less friendly than the balance you fought against, where our sacrifice was both more and shared. Luckily, there's a correction for this too, as we see through the Democratic Super-majority in California. The chance for a party to fix the system, to tip the scales back, to make a shared sacrifice what it should be. I hope they have the political courage to do so. I hope they are willing to part with the Super-Majority if it means using this time, now, to save the state from decades of sales pitches which, as is evident, promised more than they could deliver, and would only result in the certain chaos brought on by a conflation of interests among the most direct democracy.