I can assure you, that what was once luxury beach front properties in Venezuela and the islands it controls in the Caribbean are now but a couple weeks wages for someone working in SF.
I can assure you that if that house gets frequently robbed or has large homeless encampment of heroine users and drunks on the same street you wouldn't be saying it.
Then again...if you're from SF that's your daily life. So yeah....sweet house in the beach woot!
And I can assure you that what were once huge estates of wealthy barons of Russia and France, where wealth was concentrated in the hands of a few due to a lack of redistributive taxation and where there was an utter lack of social safety net due to a lack of state revenue resulting from such tax policies. People revolted, those barons were killed and their estates were confiscated.
I can assure you that I do not want Venezuela or Cuba of today. But I can also assure you that I neither want Russia of 1917 or France of 1789. Let's trudge down the middle road.
Why not? It's a lot more than just "3%" because that's in addition to the 13% state taxes they already pay. Many California businesses have already moved to Texas for lower tax rates.
This is not taxing income, it is a tax on net worth. This is not done because it is completely unworkable. If I own a successful business, who gets to decide what it is worth?
> If I own a successful business, who gets to decide what it is worth?
The market, if its publicly traded. This proposed law is about taxing the Zuckerberg's and Musk's in the State, not worrying about putting a precise value on smaller assets.
Wealth is moveable, but often not very far. Closely packed states have a big issue of people moving across state lines to escape taxes; think of hedge fund managers moving to New Jersey.
California is big, and has a lot of stuff in it people find desirable. Moving from CA is to commit to moving hundreds of miles to get to another state, which is a pretty extreme ask comparatively.
Historically CA has managed to get away with high taxes and disastrous housing policy because it was desirable; good jobs, weather, etc. With remote work it’s yet to be seen exactly where the balance of desire and cost will settle back out to.
> People subject to the wealth tax would report it to the Franchise Tax Board along with their income taxes. They would have to report all assets including stock in publicly and privately traded corporations...
Does this mean that if you have paper wealth in the form of illiquid founder shares in a startup, you'd be subject to the wealth tax? There's a nontrivial number of people that have more than "$30M" in stock in their name, but that wealth only exists on paper.
If you are a co-founder with 20% ownership of a $500M company, that's an extra $280k a year of personal taxes even if your company doesn't make it to an exit.
Correct, they are proposing that you would be able to defer those taxes up to 10 years until your exit but I don't think it has been very well thought out.
Give the state the requisite number of shares in-kind. Or pay cash, since you own 10% of a unicorn, and if you can't extract enough cash from that, you might as well burn your shares.
In many cases you can’t extract cash from non-public common stock shares with sale restrictions.
I am, on paper, a multimillionaire from my last company because of the restricted common stock I hold. However I cannot sell those shares, and the current CEO seems determined to run the company into the ground. My actual liquid assets are just enough to cover rent for a few months and I still work for a living. A wealth tax would kill me (although thankfully my paper wealth is below the $30m threshold).
How are they proposing to account for someone's networth, vs say things in family member's name that they really own, or things in trusts that the person controls, etc?
I dont know how high end finance works, maybe its an already solved problem, but it seems a lot easier to define incoming income (which is already challenging) than it is to define net worth.
The state takes a cut of growth already either as income tax or capital gains tax.
They take another cut when you spend it, in the form of sales tax.
Now they want another cut even if you’ve already been taxed on making money and prior to you then spending it.
New taxes are a scourge on democracy. They implement yet another confusopoly designed to hide details and trick voters. Just add a new, higher income tax and CGT bracket already.
> The state takes a cut of growth already either as income tax or capital gains tax.
This is true, but capital gains tax is only assessed when assets are sold. So, asset-rich individuals can acquire massive wealth, and instead of selling it, just borrow against it and sidestep any capital gains taxes. A direct tax on wealth is an attempt to change this in a way that income taxes and capital gains taxes can not, no matter the rate.
Your cost of borrowing can be much lower than the cost of taxes you incur when you sell your assets to finance your needs. As an example, Zuckerberg secured a 1% mortgage for his house[0]. Assuming his house was worth 15M, to procure that much cash by selling his FB stocks, he'd have to pay 20% capital gains tax (and state taxes on top). A nice explanation here[1].
Taxes are 1 time, mortgage interest is annual. You still have to pay off the principal + interest... at some point you will have to sell shares and pay capital gains anyway... leverage comes with its own risk. That’s why you don’t gamble with borrowed money.
But you can invest those one-time taxes and generate far more returns than the interest costs. Historical S&P500 returns are 6% per year, where as we are looking at only 1% mortgage rates for a billionaire.
Suppose there were no taxes. When would you stop taking on additional leverage with a 1% loan given historical returns of 6% ? I guess kelly criteria puts it around 2.5x. Now suppose you are already there, but now you add back taxes. Do you pay taxes or lever up ?
They propose to kick the can over to the Franchise Tax Board. The bill instructs the board to regulate "abusive transactions whose aim is to change the nature of an asset from public to nonpublic" or "assets held within trusts or other entities", and the extent of the guidance on how to do it is that regulations should disregard "any feature of an asset" which decreases the value of the asset.
I see more dark times ahead for California. If more of the tech industry allows permanent remote work, I have a feeling many of those highly paid jobs will go elsewhere. California gets a large chunk of its budget from income tax.
Dreamt up by the same people that retroactively increased income tax in 2012?
Every time CA’s pension funds look shaky, why not just go back to 2012 and bump the rate again for that year, but only if your income is over $99M and your surname is Zuckerberg.
I don’t condone the practice at all. I think it’s shameful behavior from the state — I remember at the time it felt pretty scurrilous that CA were targeting Zuckerberg et al, albeit quite passively.
America has had a form of wealth tax for a very long time now, but oddly only applied to real estate (property tax), this isn't as Weird as it sounds, nor is it a novel idea - many countries have a wealth tax.
I agree that property taxes are wealth taxes, but they’re particularly pernicious ones.
The big issue is that schools are primarily funded by property taxes, which creates a system by which the children of rich Americans get better educations than poor children, reinforcing existing economic positions.
That being said, a state level wealth tax would go a long way to smooth these things out compared to property taxes.
> The big issue is that schools are primarily funded by property taxes, which creates a system by which the children of rich Americans get better educations than poor children, reinforcing existing economic positions.
This funding disparity isn't the case in California, yet it sees similar outcomes in terms of educational achievement.
Its difficult to hide a house. It is relatively easy to value a house compared to some assets.
There are also more direct arguments for property taxes - in many places they are used to fund municipal services so its a pretty direct way of getting the people who benefit from those services to pay for them. There is also the social benefit of ususlly space is at a premium in cities, so property taxes discourage people from hoarding space they are not using.
Introduce income tax. Use the tax money to build infrastructure that allows for concentrated mega growth which kills off traditional economies and destroys thousands of years of crafting knowledge, and then introduce increasingly severe policies in order to manage the unexpected side-effects. The new policies create more side-effects and lead to more policies. Repeat Until you have so many laws and taxes are so high that the majority of people can’t compete in the economy because they can’t afford lawyers to navigate the law in the way the entrenched can, so they either start living off the government, or if their mental state didn’t survive the humiliating degradation of the whole process, they live on the street. New policies are introduced etc...
The situation can’t continue. How does it end?
This is an excellent comment. Thinking about laws or policies as dynamic processes with various feedback loops and side-effects offers a better model than the usual static approach. Side-effects are critical, so critical that they often often work against the intended goal. Yet side-effects are almost never mentioned when people advocate for a certain policy.
How does it end? Probably with brittle systems that are unable to survive exogenous shocks.
I think this concept could lend to a pretty interesting and unique game. The engine would be a city simulation, the more realistic and complex the better. However rather than build directly, the player would enact policies (laws + regulations) for the city and see how things evolve.
I would play that. Your comment makes me wonder why policy simulators don't already exist, or maybe they do and I am unaware of them. Such a simulator would have to be able to handle the "cobra effect" which could be quite a challenge.
The Cobra effect, by the way, is a great illustration of the problem with static thinking. Problem: too many cobras, Solution: pay a bounty for them, Unintended side-effect: people raise cobras for the bounty so now there are even more cobras.
> The new policies create more side-effects...Repeat Until ... the majority of people can’t compete in the economy ... they either start living off the government, or ...they live on the street. New policies are introduced ..
Sorry if I perceived incorrectly, but you are making it sound as if economic system before income tax was all hunky dory and people lived satisfying comfortable lives. From what it seems, system before income tax had much worse lives (on average) than the system after income tax.
So can you please clarify if you indeed claim that pre-income tax economic system was superior? If so, any citations?
Rich people have most of their net worth in assets afaik.
So, even "just" 0.4% of the net worth would be quite severe. Add to that, that the stocks of certain companies are inflated atm due to corona, they would have way more "net worth" than usual. So if they have to pay taxes on the inflated price and then the price falls they are gonna lose quite a bit of money.
If they can't cover it with liquid assets they would have to sell other assets at a, probably, below market rate.
I love this state but man, it is so hard to start a company when you're poor. The FTB alone will gut you, and god forbid you're just a tiny Etsy shop trying to grow. You really can't afford to try to make more money on the side when you're poor unless it's slaving away in the gig economy.
I wish there was a threshold of ARR that you can stay under and not have to pay the FTB fees. That would really help tiny businesses.
48 comments
[ 2.1 ms ] story [ 99.8 ms ] threadI can assure you that if that house gets frequently robbed or has large homeless encampment of heroine users and drunks on the same street you wouldn't be saying it.
Then again...if you're from SF that's your daily life. So yeah....sweet house in the beach woot!
I can assure you that I do not want Venezuela or Cuba of today. But I can also assure you that I neither want Russia of 1917 or France of 1789. Let's trudge down the middle road.
One percenters often have multiple houses to move to so this isn't some major obstacle.
The market, if its publicly traded. This proposed law is about taxing the Zuckerberg's and Musk's in the State, not worrying about putting a precise value on smaller assets.
They made everyone register all their guns.
Then they came in and took them.
(change "guns" to "assets")
California will subpoena cellphone location records.
They’ll query records from license plate scanners around the state, searching for those new Nevada plates.
They’ll consider you a resident just for having assets in the state, leaving the burden of proof on the defendant.
It’s particularly hard for executives whose companies are headquartered in California.
That being said, the new reality of remote work could be a paradigm shift that enables a mass exodus of firms moving their headquarters out of state.
California is big, and has a lot of stuff in it people find desirable. Moving from CA is to commit to moving hundreds of miles to get to another state, which is a pretty extreme ask comparatively.
Historically CA has managed to get away with high taxes and disastrous housing policy because it was desirable; good jobs, weather, etc. With remote work it’s yet to be seen exactly where the balance of desire and cost will settle back out to.
Does this mean that if you have paper wealth in the form of illiquid founder shares in a startup, you'd be subject to the wealth tax? There's a nontrivial number of people that have more than "$30M" in stock in their name, but that wealth only exists on paper.
If you are a co-founder with 20% ownership of a $500M company, that's an extra $280k a year of personal taxes even if your company doesn't make it to an exit.
This could kill the startup industry.
I am, on paper, a multimillionaire from my last company because of the restricted common stock I hold. However I cannot sell those shares, and the current CEO seems determined to run the company into the ground. My actual liquid assets are just enough to cover rent for a few months and I still work for a living. A wealth tax would kill me (although thankfully my paper wealth is below the $30m threshold).
I dont know how high end finance works, maybe its an already solved problem, but it seems a lot easier to define incoming income (which is already challenging) than it is to define net worth.
They take another cut when you spend it, in the form of sales tax.
Now they want another cut even if you’ve already been taxed on making money and prior to you then spending it.
New taxes are a scourge on democracy. They implement yet another confusopoly designed to hide details and trick voters. Just add a new, higher income tax and CGT bracket already.
This is true, but capital gains tax is only assessed when assets are sold. So, asset-rich individuals can acquire massive wealth, and instead of selling it, just borrow against it and sidestep any capital gains taxes. A direct tax on wealth is an attempt to change this in a way that income taxes and capital gains taxes can not, no matter the rate.
[0] https://www.cnbc.com/id/48220824
[1] https://themortgagereports.com/21788/why-mark-zuckerberg-has...
(https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml...)
Every time CA’s pension funds look shaky, why not just go back to 2012 and bump the rate again for that year, but only if your income is over $99M and your surname is Zuckerberg.
I don’t condone the practice at all. I think it’s shameful behavior from the state — I remember at the time it felt pretty scurrilous that CA were targeting Zuckerberg et al, albeit quite passively.
The big issue is that schools are primarily funded by property taxes, which creates a system by which the children of rich Americans get better educations than poor children, reinforcing existing economic positions.
That being said, a state level wealth tax would go a long way to smooth these things out compared to property taxes.
This funding disparity isn't the case in California, yet it sees similar outcomes in terms of educational achievement.
There are also more direct arguments for property taxes - in many places they are used to fund municipal services so its a pretty direct way of getting the people who benefit from those services to pay for them. There is also the social benefit of ususlly space is at a premium in cities, so property taxes discourage people from hoarding space they are not using.
How does it end? Probably with brittle systems that are unable to survive exogenous shocks.
The Cobra effect, by the way, is a great illustration of the problem with static thinking. Problem: too many cobras, Solution: pay a bounty for them, Unintended side-effect: people raise cobras for the bounty so now there are even more cobras.
Sorry if I perceived incorrectly, but you are making it sound as if economic system before income tax was all hunky dory and people lived satisfying comfortable lives. From what it seems, system before income tax had much worse lives (on average) than the system after income tax.
So can you please clarify if you indeed claim that pre-income tax economic system was superior? If so, any citations?
Rich people have most of their net worth in assets afaik.
So, even "just" 0.4% of the net worth would be quite severe. Add to that, that the stocks of certain companies are inflated atm due to corona, they would have way more "net worth" than usual. So if they have to pay taxes on the inflated price and then the price falls they are gonna lose quite a bit of money.
If they can't cover it with liquid assets they would have to sell other assets at a, probably, below market rate.
This is gonna backfire so very hard.
I wish there was a threshold of ARR that you can stay under and not have to pay the FTB fees. That would really help tiny businesses.