The Consequences Of Bad Tax Policy
To assess motivations, follow the money. This is true of paychecks, incentive compensation plans and corruption.
A version of this is happening with residents of certain high-tax states. When people tire of bureaucracy, high taxes and improper fiscal management, they have options. They can load a U-Haul, hop in the car and relocate. This fact is painfully lost on leaders in several large states.
The main culprits are California, New York and Illinois. In 2022 alone, more than 300,000 people vacated both California and New York. Illinois watched 140,000 taxpayers say adios. Similar migration is happening from New Jersey, Massachusetts and Pennsylvania.
The math helps explain why people are so motivated. With current and proposed local, state and federal taxes, wealthy Californians will face an estimated 57.9% combined tax rate. Top bracket New Yorkers will face combined taxes of nearly 60%.
Current controversy is coming from high tax states wanting to assess an annual tax on unrealized capital gains. That means many great businesses we appreciate may never have come into existence if the high tax states had their way.
A good example is Amazon. Between 1996 and 2015 Jeff Bezos toiled away building the e-commerce giant. However, during that time, Bezos reinvested the cash flows back into the business. For twenty years, Amazon produced virtually no net earnings. However, while Bezos prudently built this business, a wealth tax would have significantly hindered the possibility of Amazon’s current existence.
Current proposals from several high states are assessing a 1% to 1.5% annual “wealth” tax on wealthy individuals. So even if Amazon had no net income, wealthy owners (like Bezos) would be forced to borrow money or sell off parts of the business to fund wealth taxes.
Over the last year Amazon employed approximately 1.5 million people. Our country is a better place due to increased employment opportunities for the people at Amazon. However, if a 1% wealth tax was assessed upon Bezos from early on it is hard to know how much of the retailer’s growth would have been eliminated.
A 1% wealth tax may not seem like much, especially when attacking billionaires. However, this is not merely a “billionaire” conversation.
People having jobs is a key component of success in a capitalist society. Gross Domestic Product (total sales) for the US is about 69% consumer spending. When people don’t have jobs, they have limited spending money. Without spending money, GDP fails and the whole nation suffers.
Most of our nation’s wealth is created by first generation entrepreneurs. Especially in a technologically advanced society, entrepreneurs can move to any state that respects their contributions most. Capital flows to where it is most efficiently allocated. This includes states.
Furthermore, many tone-deaf state leaders fail to understand that in a “work-from-home” environment, people can keep a job but move several states away. This means states need to be even more accommodating to keep people domiciled locally.
If you attack billionaires, remember they have serious resources at their disposal to relocate. Additionally, billionaires are not a drag on the welfare system. Billionaires pay lots of taxes and pay to have nice surroundings. As such, communities clearly benefit from having wealthy residents.
Where are people headed? Last year, Texas added 470,000 new citizens while Florida welcomed 444,000. Both Carolinas, Tennessee and Georgia benefitted from at least 80,000 new residents.
To try and block this exodus of people and wealth, California’s wealth tax proposal includes an “exit tax.” Not only are they saying they will tax you if you stay, they are proposing to tax wealth regardless of where it is held worldwide.
The arrogance is shocking. The high-tax states are creating a stampede out the door. This causes even less wealth creation, investment or innovation in these states. Such a proposal will be incredibly hard to navigate or enforce. Furthermore, experts believe this will violate the Commerce Clause of the U.S. Constitution and the protected right of travel.
Instead of holding entrepreneurs, business owners and wealthy people hostage with some contrived tax-prison, states should study the success of business friendly, low-tax states, like Texas and Florida. Entrepreneurship and capitalism should be championed and encouraged to succeed at all levels. The success of capitalism remains the tide that lifts all boats.