Studies Show Wealth Tax Would Hurt California’s Economy

Studies Show Wealth Tax Would Hurt California’s Economy

There are no state taxes on wealth in the U.S., but California is a good bet to be the first. The idea carries some political popularity, and its promises sound sweet, but what would be the reality if the legislation, Assembly Bill 2088, becomes law? A couple of Rice University researchers have looked at Democratic Sen. Elizabeth Warren’s proposed national wealth tax and say it will “have deleterious effects, reducing labor productivity and thus wage income as well as economic output.” Would California fare similarly?

Lawmakers, who make policy for a state government that apparently wasn’t as ready as it should have been to prepare for a deep recession, are scrambling to bridge a $54.3 billion budget deficit. Roughly 30,400 would be subject to the tax, which is projected to raise $7.5 billion for the general fund. Yet it will affect everyone who lives here. The Rice scholars note that just  “a 1 percentage point increase in the wealth tax rate reduces the economic growth rate by between 0.02 and 0.04 percentage points.”

Sacramento’s proposal, which is, like the job killing Assembly Bill 5, a gift to unions, would tax net worth, outside of directly held real estate, at 0.4%. Its targets are single and joint filers whose financial worth exceeds $30 million, $15 million for married taxpayers who file separately. Democrat Rob Bonta of Oakland, one of the sponsors, told the San Francisco Chronicle he wants the bill to be passed in addition to the millionaire tax that was introduced in late July, about 2 1/2 weeks before AB2088 was amended to become a wealth tax. Given that about half of the income tax burden in California falls on the top 5% of income earners, a small slice of the populations, it’s reasonable to wonder what sort of impact the double dip would have on the few the state can’t afford to lose.

Similar taxes have been tried before. While most expect new and temporary taxes to become permanent, several governments have dropped their wealth taxes. In 1996, 14 of the 37 nations that are members of the Organization for Economic Cooperation and Development taxed wealth. OECD data show that only four do so in 2020.

“Over the years, countries have repealed their net wealth taxes for various reasons, but economic impact is included in those reasons,” says the Tax Foundation. “French Finance Minister Bruno LeMaire has made it clear that the repeal of the wealth tax in France is part of a reform package designed to ‘attract more foreign investment’.”

Earlier this year, the American Action Forum found that:

  • “The Warren wealth tax would cost workers $1.2 trillion (in 2018 dollars) in lost earnings over the first 10 years, and ultimately, for every dollar of revenue raised, workers would lose more than 60 cents of earnings.
  • “The Sanders wealth tax would cost workers $1.6 trillion (in 2018 dollars) in lost earnings over the first 10 years, and similarly impose over 60 percent of the burden of the proposal on workers.”
  • “If the federal government needs to raise more revenue, these specific proposals are poorly designed and would have a uniquely negative impact on workers’ real wages – ultimately imposing an effective tax of 63 cents on workers for every dollar the government raises in revenue from the wealthy.”

Of course, the losses as measured in dollar amounts wouldn’t be of the same magnitude in California. But this state has the largest economy in the country, the fifth largest in the world if it were its own nation. So, the overall financial damage would still be immense while the burden on workers would not proportionally change.

Policymakers will also have to overcome the difficulties in imposing a wealth tax. Administrative and compliance costs are high, and the taxes themselves often fall short of their redistributive goals.

Since it’s unlikely lawmakers will get to the bill before the session closes at the end of the month, they can use the next few months to sharpen their arguments for the debate over its merits and its flaws after it’s reintroduced next year. There’s plenty of economic literature for them to go over.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

 

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