While Massachusetts Senator Elizabeth Warren is gaining attention and objections on how she proposes to pay for her Medicare-for-All plan, let’s focus on the initial defense of her wealth tax proposal which proves to be a succinct explanation for why middle class Californians embraced Proposition 13’s property tax protections.
Warren defended her wealth tax on rich taxpayers with the following argument: “Middle class America has been paying a wealth tax forever. It’s called a property tax on their principal accumulation of wealth, which is their home.”
Except that the difference between affixing a wealth tax to billionaires on all assets and a wealth tax on middle class homeowners has different repercussions. The wealth increase on homes are paper profits. The homeowners suffer when they don’t have a corresponding increase in income and therefore don’t have the resources that Warren argues (debatably) the rich do in liquid assets to pay the annual tax.
Of course, that was the story behind the Proposition 13 tax revolt. Property values accelerated far faster than incomes under the pre-Prop 13 tax formula and many taxpayers lacked the ability to pay despite, on paper, their increased wealth. By capping the property tax, the homeowner isn’t faced with a large tax boost they can’t meet.
This is not to say that the Warren wealth tax is a good form of taxation given the many obstacles to make it work and the many extravagant plans Warren has that would eat up any new revenue. That is if the revenue is as projected which is doubtful, to put it mildly. This Wall Street Journal editorial exposes the failed wealth tax measures in Europe.
In a sense, the wealth tax, in the form of a property tax, also failed in California in the 1970s.
The rich who have the wherewithal to do so will move assets to prevent greater taxes. A tax on assets like paintings and diamonds will certainly depress the markets for such goods and lower the expected tax take. How to assess the value of illiquid assets and defend those evaluations in tax courts will be quite a spectacle and probably demand hiring a whole slew of new IRS agents and accountants.
There’s another lesson on taxation that comes out of California’s experience that Senator Warren should consider if she ever gets in the position to push her wealth tax plan.
California, relying on high-end taxpayers, experienced a roller coaster budget over the years. It hasn’t happened in a while with the state’s economy running a record string of positive economic news, but a downturn will come. When it does the state budget will be hit hard. That is why Gov. Gavin Newsom proposes to hold on to a large surplus but it may not be enough if the recession is big and brutal.
If a Warren Administration intends to fund her many proposed programs on the back of the wealthy, any national economic downturn will tear holes in the federal budget and cripple any program plans she champions.