Monday, April 4, 2011

Why Tax-on-Millionaires Measure is an Airball

Sometimes we worry that we're doing long-term damage to our brain by reading so many idiotic articles in the course of writing this blog. Our latest cause for concern is a piece so dumb that policymakers in California are almost certain to take it seriously. And, frankly, we found it disturbing enough that we couldn't let it slide by.

The article, entitled "Why Tax-on-Millionaires Measure is a Slam Dunk", comes to us from Calbuzz. It's a long-winded tour de force of nonsense, so we'll spare you by offering our one-sentence summary: "Income disparities are bad, so we need taxation to eliminate them". Their argument relies heavily on an interview with Nobel Laureate Joseph Stiglitz in the noted policy-analysis magazine Vanity Fair, but it's not much more sophisticated than this. They cite the usual numbers demonstrating the disparity in income between the wealthiest Californians and the rest, and declare that, insofar as government action provides the foundation for prosperity and growth, underinvestments in infrastructure and education, as well as the 2008 crash, are the result of these awful rich people being selfish and using their cronies in government to avoid paying taxes. Therefore, Gov. Brown needs to push for tax hikes on the wealthiest Californians, such as this proposal from the California Federation of Teachers. We'll give them this much: usually socialists disguise the wealth envy motivating their politics with utilitarian arguments; but Calbuzz makes only passing mention of the benefits the extra revenue could provide to the state. For them, this really is about using taxation to punish people for having money.

We could respond to this in many ways. On a practical level, raising taxes on wealth might not dissuade the crony capitalists from staying in bed with Sacramento, but the productive wealthy might react differently. Given the current rate of capital flight and population outflow from California, it's far more likely that these folks will choose to take their dollars and jobs elsewhere. And even if you like the utilitarian argument for these taxes (e.g., "but we could keep the schools and hospitals and police officers and . . ."), it doesn't follow that more money will balance the state's finances or maintain funding for services the public wants. Aside from its historical inability to live within its means, Sacramento just cut billions in funding for social services, yet can't bring itself to stop paying for free cars, gas, and repairs for legislators. So label us skeptics. But the best utilitarian argument against taxing wealth is this: the lifestyles of the wealthiest Californians will not change based on a 1% hike in income tax; what will change is the level of savings they have left to invest. Less capital being saved means fewer jobs being created. And again, we're in a nasty recession already, folks.

But we prefer the more obvious rebuttal of this nonsense. To quote Jennifer Aniston from Office Space: "You're gonna get a lot of money? And it's not yours? How is that not stealing?" Because that's the stark fact of the proposed tax on the rich: they have money, and people without money want to confiscate it from them by force. You can paint it any way you like, but your best argument is that the ends justify the means. Meaning that you haven't justified anything. Income inequality is simply a fact of nature, regardless of what Joseph Stiglitz thinks. (Side anecdote: we saw Stiglitz speak back when we were in grad school, and then he recommended investing in European sovereign debt. So, let's just say his thoughts on economics and public finance deserve some skepticism.) Kobe Bryant isn't massively wealthier than us because of evil malfeasance: he's wealthier because he has physical gifts and skills we don't. And Steve Jobs isn't wealthier than us for any other reason than his ability to develop incredible technologies before we could. And so on down the line: while many rich people undoubtedly attain their wealth through special favors from government, most of them have more money than you because (a) they wake up earlier than you, go to bed later, and spend less time in between enjoying themselves; (b) they're smarter than you; and/or (c) they've taken risks you weren't willing to take. So the "punishment" rationale for taxing the wealthy falls apart as well. Aside from being a terrible basis for public policy, wealth envy is also a terrible way in which to view other people.


  1. "Evidence from surveys of migrating households, the existing economic literature, and the new analysis in this paper all suggest that taxes do not play any notable role in causing people to leave a state. The most important factors in influencing household migration are economic and family-related reasons. If anything, higher state income taxes are shown to decrease the
    numbers of people leaving a state. Taxes do appear to influence the choice of which state to live in once a person has decided to move, but the impact is modest. If states use the revenues from higher taxes to create jobs, reduce unemployment, and reduce property crime, the small negative impacts from taxes can be
    easily overcome."

  2. You might want to give that whole "correlation=causation" thing a second thought. Given the dramatically different economic circumstances and tax structures across states, and the fact that the extremely wealthy are a small minority, analysis of state-level data is a very blunt instrument for studying the relationship in question.