The smartest people (just ask them) are those who work for the big high-tech firms, investment banks and big media companies. They tend to live around San Francisco (Silicon Valley), Los Angeles, Portland, the Seattle area, New York and Chicago.
For years, they have financially supported and voted for very liberal Democratic politicians who have engaged in reckless spending, very progressive taxes, nanny-state regulations and all sorts of so-called social justice causes, without considering the consequences.
In the meantime, less arrogant and more sensible Americans have been migrating to states like Texas, Tennessee and Florida, where taxes are lower, regulations fewer and more sensible, and where the Bill of Rights (including the right to speak freely, go to the church of one’s choice and own guns) is taken seriously. The flight from the liberal plantation has been going on for years, but in recent months it has turned into a tidal wave of people desperate to get out and regain some freedom.
It has reached the point where New York Gov. Cuomo has gone on TV and literally begged wealthy New Yorkers to return — because even he has finally noticed when the productive citizens flee so does the tax base.
Despite very high tax rates, tax revenues never keep up with spending schemes of the politicians. As a result, deficits get larger and larger since state and local governments, unlike the federal government, cannot just print money. It is only a matter of time before states like Illinois and cities like Chicago go bankrupt, like Detroit did a few years back, causing massive layoffs of government employees and huge reductions in government programs.
Some leading Democrats like Sens. Elizabeth Warren and Bernie Sanders are pushing for a wealth tax. There are two types of wealth taxes. Explicit taxes on wealth, and policies that destroy wealth such as the failure of politicians to use the police powers to protect property from assorted criminals and the failure to maintain the necessary infrastructure to support offices, residences, retail places and factories.
Two very able tax economists, John W. Diamond and George R. Zodrow, have just published an analysis of Ms. Warren’s wealth tax proposal, which would be a 2% tax on wealth of more than $50 million, and a 6% tax on wealth of more than a billion dollars. A wealth tax is a tax on savings and productive investment, and by definition reduces the amount of money available for investment and job creation.
Mr. Diamond and Mr. Zodrow find that the Warren version of the wealth tax would reduce long-run GDP by 2.7%, cost about 1.8 million jobs and reduce average real incomes by a couple of thousand dollars.
This, of course, assumes that the wealthy would stay around to pay the tax and not move their assets to jurisdictions where they are better treated. Over the last century, many countries imposed wealth taxes. In virtually all cases, the result was a disaster, as little tax revenue was actually collected, and investment and jobs moved elsewhere, thereby forcing a repeal of the tax. Those who now advocate such taxes only prove they are ignorant of economics and economic history.
The State of California already taxes some income at more than 13% and now some members of the legislature are proposing to increase the state income tax rate to nearly 17%. Such a rate, combined with the federal income tax, gives an overall rate well in excess of 50%.
The Wall Street Journal reports that a number of those working for Silicon Valley firms have moved to the Nevada side of Lake Tahoe. It is only a couple of hours drive to San Francisco Bay, and if you don’t have to go to the office very often — which is increasingly common — living in Nevada, which has no state income tax, becomes very attractive.
The combined state and federal capital gains tax rate in California is over 40% with no adjustment for inflation, which means that the effective rate for many capital gains can approach or even exceed 100%. The U.S. Treasury Department has studied the economic effects of capital gains taxes many times and, as far back as the Reagan administration, determined that capital gains rates in excess of 15% are probably money losers over the long run, given that people have discretion about when they sell an asset resulting in a capital gain.
The lockdowns brought about from the COVID-19 crisis have taught businesses how to have many of their employees work from home or distant locations. The riots and looting in a number of big cities have made them unsafe and undesirable as stores and restaurants have shut down. Commercial, office and residential property values are falling rapidly in places like New York, San Francisco, etc., costing business and individual property owners hundreds of billions of dollars. Downward spirals are hard to reverse.
Florida and Texas have no state income taxes, with freer lifestyles. Florida is better managed, more fiscally responsible and far less corrupt than New York. Perhaps the smug liberals are not as smart as they think — and now are paying the price for not considering the consequences of their reckless votes.
• Richard W. Rahn is chairman of the Institute for Global Economic Growth and Improbable Success Productions.