If you live in California, you will have been inundated with a barrage of ads over several propositions that are on the ballot in the upcoming elections. The main ones are Propositions 40, 41, and 42 and all relate directly or indirectly to a proposed wealth tax on billionaires. While Proposition 40 deals directly with this tax, the other two have been thrown in in an effort to confuse voters and stymie implementation of 40 even if it passes.
To understand the need for a wealth tax, we have to understand that while most people pay taxes on income, the very wealthy pay almost no tax. How do they do it? Because they do not receive any taxable income. For example, Google founders Larry Page and Sergey Brin receive salaries of just one dollar per year. They receive their massive compensation in the form of stock that become taxable only when they sell any of it, and even then they pay only the capital gains rate which is a maximum of 20%, much lower than the top income tax bracket of 37%. But they do not pay even that. What they do is keep their stock intact without selling and take out loans with the stock as collateral. Since these are loans, they are not taxed at all. So these people have access to huge amounts of money to spend lavishly without incurring any tax liability.
The tax policies that are so favorable to the wealthy have resulted in a massive expansion in the wealth gap, as Nicholas Lemann writes.
Back in 1959, in what’s thought to be one of the first precise calculations of the distribution of wealth in the United States, the economist Robert Lampman found that, six years earlier, the top one per cent of adult wealth holders—those who had at least sixty thousand dollars in assets—had accounted for twenty-four per cent of national wealth, and that their share had fallen considerably since the nineteen-twenties. Inequality began accelerating again in the late seventies, and the amount of assets in the hands of the top one per cent increased dramatically. Today, that group, made up of those with more than eleven million dollars in net wealth, holds thirty-two per cent of national wealth. Just the top tenth of one per cent hold fifteen per cent of national wealth, amounting to twenty-eight trillion dollars.
To bring down this wealth gap and deal with the way the wealthy are avoiding paying any tax, some have proposed the imposition of a tax on wealth itself, so that the value of their stock holdings and other assets are taxed. This movement has been developing for some time.
The Occupy movement, which began in 2011, focussed on the top one per cent as a target. Two years later, the French economist Thomas Piketty, in his best-selling book “Capital in the Twenty-First Century,” proposed a wealth tax, along with much higher top income-tax rates, as the only way to reverse growing inequality. In 2016, Senator Bernie Sanders shocked the Democratic establishment by running a close race against Hillary Clinton for the Party’s Presidential nomination, thanks to his insistent focus on income and wealth inequality. In 2018, Emmanuel Saez and Gabriel Zucman, economists at the University of California, Berkeley, who have close ties to Piketty, and David Gamage, a former Berkeley law professor, began working with Senator Elizabeth Warren on a wealth-tax proposal for her 2020 Presidential campaign: a two-per-cent annual tax on all personal wealth above fifty million dollars. Sanders, who was running for President again, soon offered a version of his own, with a lower threshold, of sixteen million dollars.
What was distinctive about these ideas was not only that they were wealth taxes; it was also that they limited the scope to a small number of very rich people, in recognition of the enormous growth in big fortunes, especially in Silicon Valley.
While the federal wealth tax did not gain traction (not surprising since Congress is largely bought and sold by the oligarchs), the referendum process allows grass roots measures to bypass it, even though it applies only at the state level. Proposition 40 is the first attempt to do so that has a real chance of success.
In the world of wealth-tax proposals, there are a few essential variables. What’s the level of wealth below which people won’t be taxed? What’s the rate? How long will the tax be levied? While Saez and his team calculated how much revenue various answers to these questions would produce, Regan commissioned polls to test the popularity of several different options. The result was a one-time, five-per-cent tax on fortunes of at least a billion dollars, payable over five years, with ninety per cent of the estimated hundred billion dollars in proceeds directed toward restoring health care threatened by Trump’s cuts.
As you can imagine, the oligarchs have flipped out at the thought of California passing such a tax and having to pay even a tiny fraction of their vast wealth and have launched a full scale war against it, and they have used their clout to get some allies who are seen as liberals, such as governor Gavin Newsom, though I have argued before that Newsom is not a friend of progressives and likes to cozy up to his fellow millionaires. Other presumptive liberal politicians and organizations have also expressed reservations about this proposition.
Two who are outspoken supporters are senator Bernie Sanders and congressman Ro Khanna whose district is slap bang in the middle of Silicon Valley, where many of the tech billionaires are located. As Khanna says:
“There’s a view that the biggest threat to American democracy is Donald Trump and not winning the House or Senate, and that we would be foolish to kneecap the prominent billionaires who are on our side. Why are we taking them on when we need their funding to compete with Elon Musk and the other billionaires on the Republican side?”
To Khanna, this is a major misreading of the mood in the Democratic Party, and he thinks that potential Presidential candidates should take note. “I believe that taxing billionaires will be one of the three key pillars to a Democratic campaign,” he said. “In my view, it’s Medicare for All, taxing billionaires, and not having foreign wars. Taxing billionaires is a key component. Joe Biden initially was going to be running on this in ’24.” For Democrats in 2028, he said, the question will be “Where do you stand?”
In order to confuse the issue, the oligarchs have introduced two other propositions.
Proposition 41 and Proposition 42, the two initiatives meant to nullify Proposition 40, will have tens of millions of dollars devoted to their campaigns. Proposition 41 presents itself as a measure to improve how the state audits spending, and Proposition 42 as a way of protecting people’s retirement savings from unexpected taxation. “Proposition 41 and Proposition 42 are hilariously cynical,” Brian Galle, one of the Proposition 40 authors, told me. “They are an anti-billionaire-tax burrito. There’s a wrapper that looks harmless”—and, inside, poison-pill provisions that would negate Proposition 40. In California, when conflicting initiatives pass, only the one with the most votes takes effect. So it’s possible that Proposition 40 could pass but still fail, if either Proposition 41 or Proposition 42 gets more votes.
The billionaires opposed to the wealth tax have threatened that if it passes, they will move out of the state. Some people like Newsom have said that this is why they do not favor the California tax but would favor a national wealth tax. But such a tax would be impossible to pass with Republicans in Congress. If California could pass it, it could serve as a model for the nation.
The advantage of state wealth taxes is that they don’t face the barrier of the Constitution’s restriction on direct federal taxation, which was amended for income but not for wealth. The advantage of a new federal wealth tax is that billionaires could not move from state to state to avoid it. (Newsom says that he favors a national tax on billionaires for this reason.) Several European nations—France and Norway, for example—have imposed wealth taxes, only to see some of the intended targets move their legal residences to other countries. The United States puts much higher barriers in the way of people who want to move out of the country to avoid taxes: they have to renounce their citizenship, and, if they’re rich, they have to pay an immediate, severe exit tax. The authors of Proposition 40 are in favor of trying to impose wealth taxes at any level of government, but others argue that a national wealth tax has the best chance of success here.
The oligarchs always act as if society would be devastated if they move elsewhere, a view very much in the tradition of Ayn Rand’s book Atlas Shrugged where all the titans of industry withdraw their services and move to a remote part of the country in protest at the restrictions on them. Franklin Delano Roosevelt faced a similar threat from the wealthy when he raised income taxes, to which he responded with sarcasm in a speech.
“You would think, to hear some people talk, that those good people who live at the top of our economic pyramid are being taxed into rags and tatters. What is the fact? The fact is that they are much farther away from the poorhouse than they were in 1932. You and I know that as a matter of personal observation.
A number of my friends who belong in these very high upper brackets have suggested to me, more in sorrow than in anger, that if I am reelected they will have to move to some other Nation because of high taxes here. I shall miss them very much but if they go they will soon come back. For a year or two of paying taxes in almost any other country in the world will make them yearn once more for the good old taxes of the U.S.A.”
I agree with FDR. Studies have shown that raising taxes in one state does not significantly result in wealthy people moving to another state. But even if they do so this time, I for one will not miss these parasites who have a highly exaggerated sense of themselves, and think that they do not need society as a whole.
Tom Steyer, Proposition 40’s only known billionaire supporter and a former candidate for governor, told me that last fall he tried to find a compromise with the measure’s opponents: “I suggested to several super-rich Californians, ‘Look, if you don’t like this, why don’t we sit down and come up with something that works from your standpoint and actually addresses the issues?’ And they had no interest in doing it.” Steyer, who made his fortune by starting a hedge fund in San Francisco, explained the difference between himself and the other billionaires by saying that he is more aware of the connection between rich people and society as a whole. “The idea that extraordinarily rich people can succeed without the support of society, and that they can preserve their wealth in the face of suffering and inequality—I don’t believe it can happen, and I know it shouldn’t happen,” he said.
…Whose vision of billionaires will prevail? If it’s Steyer’s, and evidently much of the public’s, then we may be in for a change in the workings of the country as major as the advent of the income tax. For a national wealth tax, Emmanuel Saez told me, “five per cent a year is what I would call a small, reasonable package. Things are moving very fast right now. Proposition 40 is the best shot we’ve ever had, and that’s why I’m not surprised at the interest in it. If it passes, it will be a revolution.”
Another important issue up for a vote is Proposition 3 that makes permanent a “thirteen-per-cent state income tax on millionaires, which went into effect in 2012 and is due to expire in 2030.” There is also a Proposition 39 that would require voters to present a government-issued ID, a Trump-favored measure to try and suppress voting.
So I will vote ‘Yes’ on 3 and 40 and ‘No’ on 39, 41 and 42.
I recall a number of people calling the Occupy movement a failure because it didn’t immediately achieve any of its stated goals. I realized though it had achieved a reframing of how we regard wealth. I noticed it when I started hearing characters in TV dramas describing someone as a “1 percenter”.
The super rich were no longer just on a spectrum of wealth, but seen as a separate minority who are sucking the wealth from everyone else and hoarding it for themselves.
Protests rarely change things immediately, but they can advance ideas in the public mind. We are now seeing the pay off of that Occupy movement.
@ TGoddess: good point. A change of perception might be an important piece of the work: we are all too used to talk about “people having multiple billions” without actually asking the reason why, or if it’s even logical.
I remember years ago Bill Gates being interviewed about taxes and declaring his willingness to be taxed more, as an obligation to society. But: not too much. Back then his fortune was estimated at 107 billions and he seriously declared that “he would not have been happy with the state taking 100 and leaving him with only seven”.
Because you see, being left with a measly seven thousand million dollars would have meant living like a pauper, right?
It’s a crazy world, I tells ya.
At first glance those initiatives don’t look like they should conflict with 40. Can anyone explain the conflicts?
… they … take out loans with the stock as collateral. Since these are loans, they are not taxed at all. So these people have access to huge amounts of money to spend …
Where do they get the money from to (hypothetically) make payments on the loans?
file thirteen @#3,
That is why they are so sneaky because they obscurely nullify the effect of 40.
Read this about 41 and this about 42 to see how they would nullify 40.
@Mano #5:
Thanks Mano. When I read the summarised descriptions in those links, it’s easy to see how they conflict.
Proposition 41: Require audits of new tax programs (proposition 40 is a new tax program)
Proposition 42: Ban new taxes on personal property (proposition 40 is a new tax on personal property)
Pierce @#4,
They don’t pay the loans back at all. If they sell stock to do so, that would subject them to capital gains tax on the increase in value of the stock over the ‘cost basis’, which is the value it had when they were originally given it. What they do is take out new loans to pay the interest on the old loans. Remember that they have huge stock portfolios that enable them to borrow almost indefinitely and lenders are willing to do so at low rates because the security is thought to be so good. As long as they pay the interest, the banks are happy to keep the loans on the books.
The wealthy do so until they die, because the tax law says that the cost basis of the stock inherited by their heirs gets raised to what it was at the time of their death. So the heirs can sell stock to pay back the loans with no capital gains tax. This practice is is known as ‘Buy, Borrow, Die’ and is explained in this short video.
Neat little loophole, isn’t it? As a result, wealth is passed on intact from generation to generation, creatinng an entire class of extremely wealthy people who have never done anything to deserve it.
As someone once said, it is not the things that are illegal that are shocking, it is the things that are legal.
Well, that appears to be an easy loop-hole to close. Simply change the tax law to say that the cost basis of stock remains the original purchase price regardless of inheritance. Alternatively, you could stipulate that speculative investments (i.e. stocks, real estate, artwork, etc.) must be liquidated (or treated as liquidated) at the time of death or upon transfer of ownership, so stocks cannot be inherited but the wealth generated from selling those stocks is (after the taxes on the capital gains are paid).
You could set some high boundaries, i.e. 10 million in assets can be transferred without being treated as liquid, and the heirs of the estate can each receive up to that amount without penalty. However, assets beyond that level must be treated as sold/purchased and an appropriate tax paid on that transaction.
Certainly, we should be looking very hard at how we tax inter-generational transfers of wealth (not just on death) -- and we also need to look very hard at the ways in which the wealthy hold their wealth in ways other than direct ownership. But for me, the main issue is one that’s often taken so much for granted that people don’t even realise they’re doing it:
This is a point that always comes up in discussions of wealth taxation -- people say “you can’t tax unrealised gains!”, like that’s some obvious law of nature, rather than a policy decision. They usually argue that since valuations change over time you can’t even say what an investment is really worth until it’s sold, and that it’s somehow unfair or nonsensical to force people to sell down assets to pay tax.
However, what these arguments ignore is that that’s exactly how the entire investment industry operates. Every investment vehicle, from the most pedestrian pension scheme to the most exotic hedge fund, and every single ETF, REIT, investment fund, or financial adviser in between, makes their money by charging a management fee calculated as some percentage of the notional value of the assets under management, and collects those fees by automatically selling assets. (Some also charge performance fees on top of that, calculated as some percentage of the investment gain generated, again based on notional value.) The principles are well understood, and the necessary mechanisms are already in place.
What’s more, everybody involved in these arguments should already know this. “Pay attention to management fees” is one of the most common and important pieces of advice in every single “introduction to investing” article, book, or course. So, whenever you hear somebody claim that you can’t tax unrealised gains, remember that the only options are that they either (a) haven’t got the first clue what they’re talking about, (b) haven’t really thought about it, or (c) are lying to your face and hoping you don’t notice.
Of course we can tax unrealised gains. We just choose not to.
(In fact, technically we already do tax unrealised gains, because the profits those investment vehicles generate from their fees charged on your unrealised gains are taxed… We just do it indirectly and at a very low level.)
@flex #8: “Easy” in the sense that the remedy would be fairly simple. But not “easy” in the sense of readily accomplished, otherwise we would have done it long ago. Because the people taking advantage of this have effectively granted themselves veto over any attempts to end it.
#10, Snowberry. Yes, I meant simple, not easy. it would require a change to the tax laws. Maybe. It might only take a revision of GAAP, but then such a revision would be fought tooth and nail by all the billionaires and the congress-critters they own.
#9, Dunc. I have argued against a general wealth tax, because the term wealth (in my lexicon) covers more than just unrealized capital gains. It includes real estate, personal property (jewelry and the like), and things like artwork. The value of these types of wealth is not easily measured.
However, I will agree that there are types of wealth which are conveniently assigned a value every year for the purposes you describe. If you are confining the wealth tax you are suggesting to unrealized capital gains determined at a specific time each year, I doubt there would be any good arguments saying that the value is arbitrary. In that case the value is not arbitrary, there is a clear calculation which provides a basis for service fees and could also be used for taxation purposes. If you are specifically referring to taxation on unrealized capital gains in the stock market, and using the term wealth tax as a shorthand for that specific tax I’m on board with it.
The argument which will arise is that the wealthy will need to sell some of their assets in order to pay the tax. That will strike people as unfair. For example, if I own shares of Infineon, and the value is calculated as $1,000,000,000, and I’m taxed at 5%, I will probably need to sell some of those shares to get the $50,000,000 in tax to pay. Now my shares are only worth $950,000,000. People get afraid of over-taxation when a person has to sell an asset in order to pay the taxes on that asset. In this case I don’t think it damages anyone to sell some shares in order to pay the taxes on the entirety of the shares, but there will be comparisons made about people needing to sell their house in order to pay the taxes on their house. That does happen sometimes, as property taxes and insurance costs rise in a neighborhood where seniors live on a fixed income. (As a nation we need to find a better means of taxation than property taxes. Economist Henry George, over a hundred years ago, had some thoughts on that.) This is not a reason to avoid taxing unrealized stock market capital gains, but it may be a reason to exclude real-estate or personal property from a wealth tax.
And yet the value of those types of wealth generally turns out to be measurable enough when they want to use them as loan collateral, or to insure them…
I take an incrementalist view here: start with the types of wealth taxation that are easiest to implement and least controversial, work out the bugs, establish the principles, and take it from there. I don’t think it’s possible to have a complete, perfect system worked out in advance, not least because people will change how they manage their wealth in response, so there’s always going to be a question of having to continually adjust to whatever the latest tax avoidance strategies are. So I’m not proposing this as a complete solution, it’s just a response to one of the most commonly encountered counter-arguments.
I’m probably willing to give exemptions for someone’s primary residence, but the people we’re talking about here don’t have just one… There are lots of issues with property taxation, but if someone owns a whole string of luxury properties that they maybe visit once or twice a year (if that), I’m perfectly OK with taxing them so heavily they’re forced to sell.
Mano Singham @ # 7 -- Thanks!
… the tax law says that the cost basis of the stock inherited by their heirs gets raised to what it was at the time of their death. … Neat little loophole, isn’t it?
Outrageously neat. I wonder if the same loophole applies to other assets.
As Flex said @ # 9, that could be easily plugged -- but somehow I doubt the Democrats have the political will to do so.
It annoys me greatly that entities can wallow in entitlement when claiming tax “losses” for depreciation of assets, but whenever there’s any proposal to tax asset appreciation it’s “Quelle horreur!”. I cannot see how there can’t be a rule where asset appreciation can’t at least offset the tax losses claimed. But I guess it’s child’s play for accountant types to split off an entity that has all the losses in a convoluted arrangement so that the gains of the other aren’t considered related and can’t be touched.
The part I find most amazing is the seeming unspoken, perhaps even unnoticed assumption damn near everyone seems to make: that a stock is unrealised until spent. Stocks can be traded to buy other things, they can be used to guarantee assets to obtain a loan -- they have purchasing power. They are money with extra volatility.