It's already 54% for folks with a 7 figure income deriving their income from short term investments (say, stock options). This is almost always the case in tech.
Note that before the 2017 federal tax changes, California incpome tax was deductable at the federal level without a cap (but subject to AMT), so a 40% marginal federal tax and a 13% marginal state tax did not add up to a 53% marginal income tax like it does now.
It would create a marginal combined income tax rate of 54% when you combine federal and state taxes.
From the article:
"California’s top marginal tax rate is 13.3%. The new proposal would add three new surcharges on seven-figure earners. It would add a 1% surcharge to gross income of more than $1 million, 3% on income over $2 million and 3.5% on income above $5 million."
Exactly, MARGINAL tax rate is different from the actual tax rate. It's the tax on the marginal dollar. There are deductions, and the first few hundred thousand are taxed at a lower rate.
I think they should wait until they see their budget this year.
NYC is having a bloodbath with their finances with so many of the wealthy leaving to florida and surround states.
With tech letting people work from where ever I'd be cautious of giving the tax base paying for most things another reason to leave when you need money the most.
There has been significant migration from New York to Florida for many years now (at least partly driven by tax considerations); I would expect that not many people are moving anywhere these days.
The crazy thing is you get nothing for it. In Europe you pay high taxes but you get free healthcare, free college and the same for everyone in the country. In the US you get 14 aircraft carriers and something else which I'm not sure.
State taxes don't go toward aircraft carriers. Looking at the state's budget, it looks like California spends most of its budget on education, then healthcare and welfare programs, then prisons(‽).
I realize this won’t change your simplistic “Europe good USA bad” worldview but relatively high CA taxes do support good social services and as a CA resident I have benefitted. There is a strong paid family leave program for new parents or those caring for ill family, for instance.
> In Europe you pay high taxes but you get free healthcare, free college and the same for everyone in the country.
Firstly, college is "free" but at the trade off of not everyone being able to go. Instead the government decides who gets to go. In USA anyone can go to college. It's not uncommon for people in their 30s and 40s in USA deciding to go to college. In Europe you have to perform well enough on exams very early in your life if you want free college, otherwise no college for you.
Secondly, I would argue Europe can spend so much on social services because the US buys so many aircraft carriers (and jets and bombs, etc). Post WW2, Europe's military is very weak and can't really project force at all (just look at how well Europe responded to muslim genocide happening next door 20 years ago). Without the US military presence in Europe, Russia would have annexed a bunch of eastern European states by now.
USA isn't perfect, but USA has unique problems that are hard to solve.
Indeed. Most Europeans badmouthing US military spending don't fully grasp how much they have benefited from it.
It is hard to imagine a European lifestyle as we know it today without the advantage of the US military being a deterrent to Russia/China and the latest wannabe dictator.
Please note, I am not blaming the Europeans here, just trying to be realistic and look at a bigger picture.
I'll point out that while California's public college system isn't as cheap as it was 40 years ago when I got my degree. And there is a lot of competition to get into certain schools. The state never has discriminated against students by age. So pigeonholing people early on is wholly a shitty European thing that has nothing to do with public funding.
> You can go to college in most countries in Europe even if you are a 40yo High school dropout for little money compared with US prices (2500€/year).
US has cheap prices too (see: community colleges). Doesn't have the prestige factor of ultra expensive universities, but great if you are looking for education.
Close... you get what the majority votes for. Parent comment is that tech workers (minority of population) fund a disproportionate share of the budget and are being oppressed by the majority voting for higher income taxes (to the extent the next election does not result in throwing current politicians out for raising taxes).
Tech workers are able to work from home. The great news is that they can sit in front of a screen and type away in any state and still be just as productive - few can boast that!
I think that the percentage income tax rate is, largely, an arbitrary number.
Which is to say, I can't find any anchoring, or a priori justification for, say, a 28% rate over a 32% rate, etc.
That is, until we cross 50%.
I feel that there are fundamental issue of fairness and proportionality that are incompatible with taking, via tax, more than half of any particular income - even marginal income.
Two immediate reactions I have, related to these concepts of fairness and proportionality are:
1. What does it say about the fundamental relationship of the state to the individual if we are crossing the halfway point in a taking such as this ?
2. What does it say about the economic and budgetary functions of our government (their relative profligacy) if they can't make things work at 35 or 40 or 45% taxation rates ?
Taxation is not my issue. I prefer to live in (relatively) high tax jurisdictions with robust government services and high quality infrastructure, etc., and I would like to help pay for that. There is, however, something about the halfway point that disturbs me.
There a pretty weak reform for 2020 in Proposition 15. It will tax at realistic values (i.e. exempt from Prop 13) certain commercial properties. I'd like to see much stronger reforms so that second homes are realistically taxed etc, but at least it is a start.
You could easily add in a widowed grandma on social security clause in a replacement piece of legislation - where it only applies to a single property per family/household/whatever-definition.
That said - America is full of temporarily embarrassed millionaires... So, even though the masses will never own a second home - they will vote against it because they think it will screw them over later.
California has one of the highest state income taxes AND sales taxes in the country. Combined, they can easily total nearly 20%. Yet, the state is in massive debt and infrastructure projects go no where (https://www.sfchronicle.com/politics/article/Train-to-nowher...)
I live in California. Unfortunately you're going to be disappointed - California has the highest tax rates and the worst infrastructure. The failure to solve these problems isn't due to having too little money (states and countries with a fraction of California's wealth have solved these problems).
I agree with this assessment. We moved from FL (0% income tax, 1.5% property tax) to CA (9% for us income tax, 1.05% property tax) and the quality of the infrastructure is at best on par. Which was surprising. Our SALT taxes went up 5x and the services are similar quality.
It's rather unfortunate that tax increase as a solution is such a common fallacy. It's rather like immediately recommending a salary increase every time you encounter a failing employee.
What we need is consolidation and streamlining of expenses, programs and maintenance. This, however, will serve to enable and cover over the poor policies and inefficiencies that are either causing, or at least failing to solve, the many issues we have in California.
I am very sympathetic to the idea, oft raised by critics of capitalism, that economies cannot grow forever. Why, too, would we not have the same critique of government and its services ?
A lot of comments are saying people will leave. I don't think this is true.
I think a max 3.5% decrease in income is not going to make many people move. The difference in cost of living in any major California city over most other cities in the US is much larger than that, and didn't make people move.
What is true is it will be the last straw for some small amount of people already waffling over this. It's also true that it won't make much of an impact, both in terms of people leaving and in terms of additional revenue.
It's not a 3.5% decrease in income. It's a 3.5% decrease in income over $5,000,000. The 3.5% rate does not apply to the first five million dollars, only the money after the first five million.
To be more correct, it’s a 7% decrease in income over $5,000,000 (if the total tax rate on that income was 50% before and went to 53.5%, the amount remaining dropped by 7%).
I think this point is under-appreciated. As the top federal tax rate has dropped over the decades, each additional percentage point drop has given less proportional value to top-rate-payers, while costing proportionally more of remaining federal revenue. In that sense, the lower the tax rate already is, the more expensive a tax cut is to the government. The higher the tax rate already is, the more expensive a tax increase is to taxpayers.
This is why tax cuts under Bush and Trump blew up the federal budget - tax rates were already pretty low, so quite deep cuts to revenue were required to deliver any notable benefit to high-rate taxpayers. It’s hard to make rich people much richer by cutting taxes when they are already keeping most of their income. In the case of the Trump tax cut, rates were already so low it required raising taxes on some to cut for others.
On the other hand, you can go back and find times when after-tax income of top rate payers doubled because the top rate dropped from eg. 91% to 77%, which delivered a lot of relative value to those taxpayers while fitting more easily into the federal budget (although as always, it’s probably more complicated as tax bills make changes to deductions when they change rates).
> This is why tax cuts under Bush and Trump blew up the federal budget - tax rates were already pretty low, so quite deep cuts to revenue were required to deliver any notable benefit to high-rate taxpayers
I just want to point out that after the Trump tax cuts went into effect, revenue increased[1].
GDP was growing before and after the Trump tax cut, so growth in tax revenue year over year was expected. The Trump tax cuts went into effect in 2018, and according to your link tax revenues increased from 3.32 to 3.33 trillion that year, which is a 0.3% increase. This was during a year when GDP grew by 5.2%. In other words, revenues fell behind GDP by 4.9%.
Note that I used nominal GDP growth because the linked article used nominal tax revenue. To adjust for inflation we subtract the inflation rate from both sides and we’d get the same 4.9% fallback in tax growth relative to GDP growth.
Oh yeah it's definitely debatable if tax revenue would have grown faster in a counterfactual without the cuts, but that debate is orthogonal to the point you were making about "blowing up the federal budget", which is strictly a function of receipts and outlays. If the receipts increased, then the budgets woes are clearly a result of increased outlays.
Federal tax receipts as a % of GDP has been largely flat since WW2:
Your link shows the ratio decreasing from 16.97% to 16.16% in 2018 when the bill went into effect. That’s a 5% decrease, which agrees with my above math.
Overall your chart shows the ratio has a range of 19.75% to 14.42% in the past 20 years, tracking changes to the tax code and business cycle, exactly in the way you’d expect. That’s a 36% difference between the min and max ie. not flat.
I think lawmakers supporting tax cuts try to claim that tax revenues are not sensitive to tax rates because it would be convenient if true when trying to pass a tax cut. The facts don’t bear it out, however.
I think the roots of this argument are in the theory of the Laffer Curve: https://en.m.wikipedia.org/wiki/Laffer_curve
The Laffer Curve was used to argue for tax cuts when the top marginal rate was 70%. People are still trying to make this argument, but I think they missed the part where it’s supposed to be a curve, so the result of cutting taxes from 70% is not the same as cutting them from 35%.
Right, everyone knows about the Laffer curve. It's hilariously simplistic.
> I think lawmakers supporting tax cuts try to claim that tax revenues are not sensitive to tax rates because it would be convenient if true when trying to pass a tax cut.
The point of the chart going back to WW2 is to show that it's a little more complicated and we can't draw conclusions either way.
And circling back to the original point of contention, spending is not function of GDP, or in theory it shouldn't be. Spending is a function of population. So if federal tax revenue increases even after a tax cut, but deficit increases, then the culprit isn't necessarily the tax cut, the culprit is the spending increase.
You also need to include inflation. Tax receipts actually fell on an inflation-adjusted basis in 2018. Absent any changes in government policy, you’d expect expenses to roughly follow inflation plus population growth, and revenues to roughly follow GDP.
> The point of the chart going back to WW2 is to show that it's a little more complicated and we can't draw conclusions either way.
I don’t think this is correct. Yes, the economy is complicated. No, that doesn’t mean when cutting taxes we can ignore the resulting increase in the budget deficit. A claim that cutting taxes won’t increase the deficit constrains you to make other claims according to the GDP = C + G + I + X equation, and we should demand that lawmakers be specific about those claims.
As I pointed out, the chart is not really flat. The line actually goes up and down.
> You also need to include inflation. Tax receipts actually fell on an inflation-adjusted basis in 2018. Absent any changes in government policy, you’d expect expenses to roughly follow inflation plus population growth, and revenues to roughly follow GDP.
Great point, but it increased again in 2019. In fact, inflation adjusted tax revenue has been increasing (with minor transient dips) throughout history[1]. You'll definitely find one-off variations, but the trend-line for inflation-adjusted Federal tax revenue is up-and-to-the-right.
> No, that doesn’t mean when cutting taxes we can ignore the resulting increase in the budget deficit...As I pointed out, the chart is not really flat. The line actually goes up and down.
It's complicated because the ups and downs don't perfectly correlate with tax policy. You can find moments where a decrease in tax revenue as a % of GDP coincide with a tax cut, but you can also find moments where a decrease in tax revenue as a % of GDP coincides with a tax hike and vice versa.
It's important because if you zoom out and look at Federal tax brackets over time since WW2, the US's inflation adjusted tax brackets went from 22%-92% in the 1950's[2] to 10%-37% in 2020[3], but Federal tax receipts as a % of GDP is flat / moderately increased over that period.
I think the long-term historical drop in the ratio of [top marginal rate on individual income] to [tax as a % of GDP] is mainly the result of these factors:
1) increased tax compliance
2) more tax deductions
Overall, you’d need to use a more comprehensive “area under the curve” analysis of every tax to predict the impact of tax policy on total tax revenue, and it would be surprising if it could be predicted based only on the top marginal rate.
A major source of short-term noise is the business cycle, where capital gains and corporate profits fluctuate much faster than GDP, and some automatic stabilizers decrease revenue.
It's not just the top marginal tax rate. The full bracket has fallen across the board, not just on the top marginal income tax payer.
> A major source of short-term noise is the business cycle, where capital gains and corporate profits fluctuate much faster than GDP, and some automatic stabilizers decrease revenue.
Yes, which is why it's tough to suss anything out from the minor variations between consecutive years, and it makes a little more sense to look at a longer time horizon.
I moved to California 25 years ago, and for the past 10 have become increasingly motivated to leave; due to not only tax policy, but overall politics. I'm not in the 0.5% they're targeting, but experience teaches me what comes next. The idea that it would be retroactive is very offensive. I'm 95% ready to move as-is; this kind of policy move would push it too 100 immediately.
"California's still experiencing a housing shortage"
It is, indeed -- a result of the very policy-making I'm referring to. I'll enthusiastically leave that, the ever-increasing homeless population, the high taxes, and all the rest behind when I leave.
It's more about a portend of what's to come, not that this tax per se is the final straw. Next year there will be another tax, and another tax. I'm convinced people in California won't be happy with the level of taxation until we're like Sweden or France.
Marginal tax rates in California for top earners (including the medicare surcharge) are already about equivalent to France. 37% fed + 13.3% CA + 1.45% Medicare = 52%. Compared to France's 45% income + 7.5% social security taxes.
I dunno. Seems like every time a public transportation system proposal pops up in my city, money is the number one thing they cite when they say “it’s just not feasible.” :shrug:
That's because it costs a lot to build, because voters have made it difficult by passing strict zoning laws, because they don't want people to be allowed to build.
If the city did find the money, you would then see people opposing transit on the grounds of environmental impact, or noise, or crime, or the "character of the neighborhood". Then the lawsuits would start.
Yeah I'm sure you would be very happy to get services that exclusively other people are paying for. Who wouldn't? How about a broad tax increase on the middle class and above which would actually generate the revenue necessary to pay for these types of projects sustainably? Funny how when that gets suggested, support for public spending tends to evaporate.
I am okay with a broad tax increase on the middle class and above which would actually generate the revenue necessary to pay for these types of projects sustainably. I suspect the poster you're replying to would be as well.
Yeah, I would absolutely be okay with this if it meant i could legitimately get rid of my vehicle, ride transit reliably, reduce my emissions. It would probably mean a net decrease in my expenses.
The reduction in air pollution and traffic stress/accidents could possibly lead to subtle gains in public health and reduced strain on healthcare systems, as well!
Depends on if you believe raising taxes will get you those things, or if the money will be squandered on inefficiency, large salaries for public servants, and corruption on your construction / maintenance contracts. So far, high taxes have worked out well for California. I've lived here the past 10 years and I'm looking around and not sure the money is well spent these days.
Well France is the master of all countries at taxation (they invented VAT, amongst many other kinds of taxes...). In particular when employing people, the employer has to pay employment taxes on top of the employee income (same as in the US, but at a much higher rate), and that is not subject to income tax, yet represents "cotisation sociales" (social contributions, i.e. retirement, unemployment, health taxes) that came on top of that.
Use this simulator : https://entreprise.pole-emploi.fr/cout-salarie/ and you'll see that for a 100 kEuro/year employee, what the employee sees is 55 kEuro/year (and that's before income tax). My point is that most taxation in France is not income tax, so even if a marginal rate of 45% exists, that's not where the French are most taxed (although the French would argue that "cotisation sociales" are not taxes, IMHO they very much are). Income tax is not even the number 1 tax for the French state (that would be VAT, see https://www.performance-publique.budget.gouv.fr/budget-compt...).
Not saying this is a bad thing (I wouldn't mind a top marginal rate of 90 % as has existed in the US for most of the 20th century... most people aren't subject to it), and in fact I think the French get a lot (although not enough, the state budget could be better managed) for all their taxes.
The problem with any temporary tax to pay for current hardships is that it'll never be ended.
I think a tax to help with the pandemic makes sense. But then again, it seems the pandemic should've been over long ago if the government had done the right things. The virus only lasts 3 weeks. Lock everyone up for 4 weeks and we would've been back to work 3-4 months ago.
What if you vote for your rational self-interest? This tax applies to income greater than $2 million per year. Let's assume everyone whose tax base will increase will vote against, everyone whose tax base will not increase will vote for. A popular ballot cast this way would pass by a wide margin.
In reality, some people will probably leave, and the rest will likely avoid the increase by receiving the income via lower-rate methods. It seems likely that CA is past the peak of the Laffer curve, and will lose tax revenue.[2]
Very clever to limit the tax to people making over $1 million — at that level, your pay is based more on who you know than what you know, making it harder for them to “vote with their feet” and leave California.
There is a big gap between those with money and those without in California. We need to have better average pay and close the wage gap, the tax issue then takes care of itself.
How many of those that would experience this new tax step over homeless people everyday? That is the real issue here.
For those saying people will leave, I'll note that I first heard that going on 40 years ago in a Wall Street Journal article that talked about how California's high tax rates were driving people to Nevada (now, why I remember that...?) I'm sure that the WSJ wasn't lying, and some former CA residents did, indeed, move to less taxed states. I've heard the same trope repeatedly in the years since. I'll note that the complaint most folks have with CA these days is the cost of housing, indicating that taxation didn't drive everyone away.
My understanding is that both are true; net interstate migration is away from CA, but CA's population is increasing due to international migration and relatively high fertility among some communities. On average, CA's emigrants are richer than its immigrants.
The high tax rate has the opposite effect that most people seem to assume. It attracts and concentrates high-earning people, because they're the only ones who can afford it. If you look at migration stats the category of California residents that grows is the top income quintile.
TL;DR This group pays 40% of the taxes on 23% of the wages and budget risk is that if something happens to those incomes it has an exaggerated effect and is dangerous.
What people should focus on is the percentage of how much of the taxes these people pay. That should give you an idea of how lopsided taxation has become. The top 1% in California earn 23% of the wages and pay 40% of the taxes. This does not include real estate taxes which are some of the highest in the country.
I know some say, they should. However understand when it gets lopsided it puts budgets at risk if the sources of those incomes take a dramatic shift or worse leave. So if the market tanks a lot of that income can dry up very fast. If the jobs economy moves towards remote working then businesses may not become as attached to swanky offices in expensive states moving two more sources out and further imperiling taxes.
People don't truly understand how much their government costs them. California budget is over two hundred billion dollars. the majority is from payroll taxes followed by sales taxes; about half of what income taxes were; then fees and licenses, and then property taxes. There are some other sources in there but lets say 60:40:6:4 in percentages.
California allocated nearly six billion towards issues related to COVID19 initially, not sure how much it has changed.
Its still an income tax, impacting 0.5% of taxpayers, and most companies reduce pay if the employee leaves the bay area for remote work or to work at a remote office. 1. The reduced pay might not be worth leaving. 2. There are also other benefits to be in California (e.g. friends, like-minded people, infrastructure, etc).
Even if some of those taxpayer chose to leave, demand for housing and goods/services is reduced, but supply stays constant. i.e. prices decrease for the people who choose to stay.
Reducing economic inequality for the people who choose to stay in California. Seems like a win either way.
In the US, healthcare is likely the least of your concerns if you're making > $2M/year
Universal healthcare would be great if it brought down the ridiculous costs for basic health services and it helped the growing number of homeless and impoverished escape the cycle. The people who already pay will probably never pay less but it's so frustrating to see bills for thousands on simple things like an x-ray?
My partner recently dislocated her shoulder and we were billed $1,500 to get an x-ray. Nothing crazy just tripped and hit the shoulder the wrong way. We went to immediate care center, after waiting over an hour, the doctor tells us they don't have an x-ray tech on the weekend so we need to go to the hospital emergency center. Still got billed for immediate care visit. Then we go to emergency center, wait almost 3 hours, get an x-ray (nothings broken), they pop it back in (no sedative, no equipment, took literally 5 seconds), a month later we get a bill for almost $5,000 for shoulder surgery! We dispute the charge, get it knocked down to $1,500 (for an "emergency room" x-ray that we waited three hours for and only went because the immediate care center owned by the same org didn't have x-ray tech on the weekend) and after insurance our out of pocket charges are basically the same.
I've had good health care experiences in US but often the charges just have no basis in reality.
Yep. Higher taxes + minuscule military spending (compared to U.S.) + citizens who probably believe more in governance and social welfare than your average American.
US tax revenue per capita is nearly double that of the UK, more than enough to offset the difference in military budget. popular opinion is the only meaningful difference that you listed.
It's actually a zero percent increase on someone making $1 million, as it only applies to income over $1 million. If you made $2 million, you'd pay 1% of the second million, or $10 thousand.
$10k is no big deal to someone making $2m per year. But that person is already paying ~$240,000 per year in California state income taxes[according to a random tax calculator I just googled]. So they're already voluntarily paying $2.4 million per decade, $24 million over a working career for the privilege of living in the state of California. And yet that isn't enough.
In the immortal words of CCR, "And when you ask 'em, 'How much should we give?' Ooh, they only answer 'More, more, more!'"
Maybe if you're not in that situation, you don't have the best insight into their mindset, how they would react, and at what point they decide to move to a different tax locale.
It's very easy, but not very helpful, to theorize about what you'd do given taxation policy you don't actually have to deal with.
That's only the 1m - 2m segment, not the 2m+. Also, the last steep hike was 7 years ago. Many people will see the writing on the wall that taxes in CA are going to squeeze most of their marginal income.
I know! If we tax them too much, they'll have to... live like 98% of the country already does[1]. That's totally comparable to being killed. Good analogy.
This shows that wealthier people are moving to California, while middle and lower income people are leaving (People with an income lower than 110k a year).
Well yeah, but I think that's somewhat the goal here. Given the overcrowding in regions of California, I can see why some people would incentivize others to leave the state. Especially the very wealthy.
If a bunch of people with 10-100x your income kept moving into your city, driving property prices into the stratosphere, you'd be pissed too. It doesn't stop with houses either. All of the middle class stores start getting replaced with higher cost ones that cater to the ultra-wealthy, leaving you to drive further out for good deals.
Resident who don't want to be pushed out have their own breaking point to, and instead of voting with their feet, they vote to evict the invaders.
California isn't the only place where this a problem. All across the world we are seeing pushback against ultra-wealthy taking over cities/neighborhoods and driving out middle class residents.
Most of the residents you are talking about were "invaders" one time too. The difference is that when they showed up, more housing was built for them.
Today, more housing does not get built, primarily because of strict zoning laws supported by the existing residents, so newcomers end up competing with existing residents for housing.
On the other hand, if new housing was built for the newcomers, they would contribute to the economy of the city and pay taxes, and their presence would be an overall net positive.
Something is really wrong with the way a city is run if an influx of high earners is considered a bad thing.
Driving up prices such that a minority population can afford it is a solution to overcrowding -- not a cause of it. In fact, its the natural market solution to overcrowding: demand exceeding supply..
And yet, the problem isn't fixed, even after 20+ years of this "natural market solution".
Turns out, these people have to live somewhere, so now they travel from further out by car, causing a bunch of traffic congestion. They had to move, but the jobs are still in the same place.
If you have 20,000 people in the city, and 200,000 people outside
and you kick out the 20,000 people in the city, to another state
so 20,000 suburbans move into the city
now you have 20,000 people in the city, and 180,000 people outside
I'm not sure what you've solved. It feels like you're arguing this is a knee-jerk reaction, and a fair reaction, and that this is a solution, but you keep avoiding saying how it actually solves anything regarding overcrowding. Like it solves every problem except the one under discussion.
There has not been a "natural market solution" for housing for two reasons: strict zoning laws, and rent control. Both of those together have caused the housing shortage.
If overcrowding is the problem, and you're looking at wealth, then you'd want to encourage the poor masses (the 99%) to leave, not the tiny population of the 1%.
Because the wealthy are the most salient aspect of this problem. They are the only ones that can afford the $4,000/mo rent and $2,000,000 "starter" homes in the neighborhood.
People feel like they are being forced out of their homes by these people and they are fighting back.
If the buyers that keep pushing the high end of the market higher, are the ones who leave, then the likely result is prices will fall until properties start moving again.
Is the problem overcrowding or empty housing? Because overcrowding implies that even with lower pricing... there still aren't enough houses to go around.
Empty housing is a different issue, and I'm not sure I've heard much of that being a problem in California (mostly heard this argument for Vancouver and NY)
If you are making literally 10 figures annually this increases your tax bill by an overall amount of about 3%. Every ten years you can buy one fewer yacht. Oh no.
The real headline is "California considers hiking tax rates by 3% for people earning over $2M in income".
Maybe worth editing the description.