“This is the flipside. They said tax the rich, tax the rich, tax the rich.

We did that. The rich leave… and now what do you do?”
 

                -New York Governor, Andrew Cuomo – Feb. 6^th, 2019

There is growing drum beat out there. Increased wealth inequality has people at or near the top of income distribution getting a lot of attention lately. We are reading/hearing too often that many who are worth a lot, don’t really deserve it.

In the USA, just in the last few weeks:

• A wealth transfer tax that will impose asset forfeitures of 2-3% on households with more than $50 million in assets… on an annual basis.
• A 70% income tax on incomes over $10 million.
• Modern Monetary Theory (or “MMT”) where central banks print money and pay government expenses, freeing the government from reliance on fiscal policy that is constrained…well…by the amount of money it can collect.

But maybe let’s start with what does it take to be in the top 5%? 10%? It’s not as much as you would think.

In the USA, to get into the top 5% of all income earners, one would have to have a family income of $166,200. To get into the top 10%? $100,000. Those barely get you by in cities like New York or San Francisco.

In Canada, you’re in the top 5% if you earn a total family income of $179,800, and $134,900 to be in the top 10%. That figure will barely get you by if you live in Toronto or Vancouver.

But here’s where it gets interesting. According to the Tax Policy Centre, a joint venture of the Urban Institute and the famed Brookings Institution, approximately 76 million, or 44% of all American’s don’t pay any taxes. The top 10% of earners in the USA now account for about 70% of all taxes paid. The top 1% paid a greater share of individual taxes (about 40%) than that of the entire bottom 90% (30%).

In Canada, our own Prime Minister in early February admitted that 40% of Canadians don’t pay income taxes, which means the rest are picking up the bill. The top 20% in Canada are actually paying about 70% of all income taxes, the top 50% of Canadians pay a whopping 95.5% of all income taxes.

But, I will admit there is a growing problem (and I think it will have a HUGE impact on policy going forward) on the gap between rich and poor. According to Forbes magazine’s annual poll, here’s where all the billionaires are located on the planet:

(Forbes, 2019)

In the USA, the 400 richest Americans now own more than the bottom 150 million people:

Taxing those already paying for everything more is not the answer. History has shown it. Being a music fan, I know Great Britain in the 1970’s and 1980’s had the highest tax rates that were as high as 83% and never dipped below 70%. What happened? Well I know the Rolling Stones, Rod Stewart, Elton John, and David Bowie were just some that left. Beatles George Harrison wrote the song “Taxman” to protest the unfair split: “There’s one for you, 19 for me”.

There are only four nations who currently employ a “wealth tax”: Spain, Norway, Switzerland, and France. France enacted their wealth tax in 2008. Since then, an average of 12,000 millionaires per year have left the country (Prime Minister Edouard Philippe, Sept. 29^th, 2017) creating incredible budget problems.

Closer to home, famed hedge fund billionaire David Tepper in 2016 left the high tax state jurisdiction of New Jersey after living there for 20 years to move to the state of Florida, to be “closer to his mom”. New Jersey has a state income tax bracket of about 9%... Florida? Zero. It has been estimated Mr. Tepper paid $600 million in taxes the year before he left, and by leaving, wiped out the entire state budget of New Jersey. Just by one person moving!

In mid-February, Warren Buffet’s longtime partner 95 year-old Charlie Munger, spoke at this year’s Berkshire Hathaway’s annual meeting and focused his comments on democratic fiscal policy, wealth taxes, and liberal tax policies being pushed around.

Mr. Munger’s quote was: “A lot of civilizations work very well with low taxes on the rich. So it’s a very complicated subject and there’s a lack of evidence that one system is better than another. Hatred blinds reason and both sides are blinding reason. How can it possibly be good? Driving the rich people out is pretty dumb if you’re a state or city. They’re old. They keep your hospitals busy. They don’t burden your schools, the police department, your prisons. They give a lot. Who wouldn’t want rich people?”

A wealth tax is not a new idea. But it’s easier said than done. Just calculating it annually would cost an immense amount of time and effort. Some households would get hit harder than others since wealth is not homogenous. And really, those wealthy would just move.

A tax of 70% on incomes over $10 million? That affects only 16,000 households in the USA. There are simply not enough of them to collect what you think you’d collect. We saw this picture during Obamacare. Only households making $250,000 were going to pay “a little more” so everyone could have healthcare, and eventually reality kicked in when it got down to $80,000.

This populist, eat-the-rich, behavior is a global phenomenon right now. In the UK, high taxes forced industrialist Jim Ratcliffe, Britain’s richest man to flee to Monaco, an international tax haven. When he got there, he and his execs took a $10 billion (Pounds) distribution, saving up to $4 Billion in taxes. Another Brit people would know, Sir James Dyson, moved his vacuum cleaner business to Singapore.

Billionaires like Jeff Bezos, Elon Musk and Richard Branson are all competing to get to Mars. Do populist politicians believe they can’t skip town to save a few billion in taxes? It’s really easy for the rich to move.

New York, California, Illinois and other high tax states are finding out the hard way.  I started with a quote from NY Governor Cuomo. In New York State, the top 1% pay 46% of all taxes. But according to United Van Lines 42^nd Annual National Movers Study, 61.5% of movers were out of New York State while only 38.5% moved in. Of those who moved out, 46% earned $150k or more. That’s why the state had a $2.3 Billion shortfall in its budget.

From 2007 to 2016, NY State lost 1.3 million residents, followed by California at about 1 million, and Illinois. What do they all have in common? Where did they go? Some went to Texas, Florida, North Carolina, Tennessee… all the lower tax states.

In short high taxes drive people away. Lower taxes attract people. Always have, always will. But the income tax burden has grown more progressive over time as this chart shows:

 

Taxes matter. Even seen recently in sports when baseball free agent star Bryce Harper, turned down bigger offers from the San Fran Giants and the LA Dodgers for Philadelphia. Perhaps California’s ridiculously high 13.2% state income tax when compared to Pennsylvania’s 3.07% state income tax, on a $30 million/year contract works out to a substantive sum of money. Taxes matter, even in sports.

The truth is, we all need more billionaires. They create companies which revolutionize, create jobs, generate wealth for retirement plans, donate to charities, and yes, pay a lot of taxes. Maybe billionaires should pay higher taxes, or at least their estates should. That is another debate, but their existence isn’t a sign that capitalism is immoral, it’s a sign of economic vibrancy.

Finally, to end this piece with wisdom from “The Ten Cannots”. The original text was from 1916 by a Rev. William J.H. Boetcker who published in a pamphlet entitled “The Ten Cannots”, which was then republished in a leaflet in 1942 by a conservative political organization named Committee for Constitutional Government. The leaflet includes not only quotes from Rev. Boetcker but President Abraham Lincoln as well. A misprint in the leaflet lead people to believe the following quote was from President Lincoln, honest mistake.

The Ten Cannots:

• You cannot bring about prosperity by discouraging thrift.
• You cannot strengthen the weak by weakening the strong.
• You cannot help the little men by tearing down big men.
• You cannot lift the wage earner by pulling down the wage power.
• You cannot help the poor by destroying the rich.
• You cannot establish sound security on borrowed money.
• You cannot further the brotherhood of man by inciting class hatred.
• You cannot keep out of trouble by spending more than you earn.
• You cannot build character and courage by destroying men’s initiative and independence.
• You cannot help men permanently by doing for them what they can and should do for themselves.

All the best,
Vito
 

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