Neil H. Buchanan

California and New York City are the current epicenters of efforts to slightly increase the taxes paid by the extremely rich. Unsurprisingly, those extremely rich people are willing to use their considerable resources and power to try to convince voters and lawmakers that such taxes are a terrible idea. The anguished responses from the anti-tax side can be almost amusingly shrill, with one billionaire recently saying this on the record: “I must say that I consider the phrase ‘tax the rich’ — quote, tax the rich — when spit out with anger and contempt by politicians both here and across the country, to be just as hateful as some disgusting racial slurs.”

An especially forgiving person might call this a matter of opinion, I suppose, but it takes a particularly narrow view of one’s self-interest to equate calls to tax the wealthiest people in the world to the horrors of racism. In any event, with the rhetoric running so hot, it is essential to be able to rely on a measured, objective analysis of the actual proposals that are under consideration. Fortunately, Professors Brian Galle, David Gamage, Emmanuel Saez, and Darien Shanske (henceforth GGSS) have stepped up and provided a clear, exhaustive, and mercifully brief report on California’s proposed Billionaire Tax.

GGSS’s short report is a master class in clear and persuasive refutation. Section headings include: “Will it hurt the businesses that the billionaires own?”, “Won’t billionaires leave California to avoid the tax?”, “Have some billionaires already left?”, “Will billionaires or future billionaires be deterred from coming?”, “Won’t the wealthy be able to hide their wealth and evade the tax?”, “Will new entrepreneurs be discouraged from creating new businesses?” and “If some California billionaires get upset at having to pay 5% of their wealth for this one-time tax and leave the state, won’t this be detrimental to future tax revenue in California?” along with some additional, more technical questions. In each case, the answer is “no.”

No one who cares about these issues should fail to read GGSS’s evenhanded analysis, which shows that the proposed tax would not cause any of the problems that its opponents are paying millions of dollars to convince us will surely follow. And I emphasize the word “evenhanded” here because, even though the authors come down squarely in favor of the policy in question, they are scrupulously fair in presenting and assessing the evidence. The clarity of the report is a virtue, but the authors’ evenhandedness – that is, their insistence on maintaining their objectivity – makes it stand out.

To be clear, objectivity is not the same thing as neutrality. Jurors are supposed to begin a trial both neutral and objective, for example, but by the time they reach a verdict, they are supposed to have relied on their objectivity in assessing the evidence and arguments, all in the service of reaching a nonneutral conclusion. That is what Galle, Gamage, Saez, and Shanske have done in their report. As it happens, assessing the validity of the claims that they address turns out not even to be a close call, yet GGSS patiently work through all of the claims that are made by those who oppose the Billionaire Tax.

The authors’ objectivity is especially notable here, because the response from billionaires to a recent wealth tax proposal in New York City (the so-called “pied-a-terre tax”) has been so extreme that it has infected even supposedly objective news reporters. As I explored recently in “Shouldn’t Rich People Be Able to Afford Better Anti-Tax Arguments?  (New York City edition),” a reporter for The New York Times stated as fact a series of unsupported (and unsupportable) claims that were made by real estate brokers and their in-house economists regarding the supposed dangers of adding a small tax on luxury real estate. In such a hot-house environment, GGSS’s just-the-facts approach is all the more welcome.

GGSS explain that California’s proposal in question is “a one-time 5% wealth tax on California billionaires, payable in annual installments of 1% over five years (with a small deferral charge).” Importantly, however, they first explain why it is important to collect such a tax in the first place, which is that California (and all other states) are under increasingly severe fiscal pressure as the federal government pulls funding away from states while shifting expensive obligations onto them. That paragraph is then backed up in the opening section of the report, which notes that last year’s large and regressive federal tax law will cause California to lose $19 billion in funding for health care, while cuts in Supplemental Nutrition Assistance Program (SNAP) benefits will both cause more people to go hungry and indirectly drain funds from California’s public schools. GGSS then provide estimates of the potential revenue that the Billionaire Tax is likely to raise, which will then be used to plug those federally inflicted holes that California (like most US states) is trying to fill.

The reason that I applaud GGSS for leading with the “why” of the Billionaire Tax is that far too often tax analyses look only at the possible consequences of collecting revenue, not on how it will be used. As my dissertation advisor once put it, reading such one-sided analyses could lead a person to think that “governments collect money from taxes and then dump it in the ocean, rather than actually spending it on the public’s needs.” It is, of course, important to know whether governments spend public monies on important goods and services (as opposed to, say, wasting money on expensive vanity projects), but the point is that fiscal policy is always a matter of weighing costs and benefits, whereas too many anti-tax polemics are focused only on the supposed costs.

How can we be sure that GGSS are right about any of this? After all, experts disagree, right? Actually, none of the objections that have been raised against the Billionaire Tax in California are new or unique to that particular tax proposal, and none of them are even close calls for any but those with an axe to grind (or who are being paid by billionaires to say that up is down and winter is spring). Trickle-down economics has been tested and retested for decades, and even though the results continue to show that the scare tactics about taxing the rich are based on nothing but rumors and vapor – “continuously unproven” might be the most polite way to describe those claims – these are the same arguments that we see every time. To their credit, GGSS address their answers to the specific tax and jurisdiction in question, but I can state here that nothing I saw in their report was the least bit surprising to someone who follows the empirical work in this area more broadly.

Similarly, the latter section of GGSS’s report responds to well-worn constitutional objections, including the baseless claim that the tax would be retroactive and thus prohibited, which is not true. And although the US Supreme Court might one day contrive a new prohibition on taxing wealth, such claims as of now have been relegated to dissenting opinions and scattered academic commentary. In any event, when GGSS address the objection that a wealth tax would supposedly violate the United States Constitution, they do not waste anyone’s time with yet another debunking of that claim but instead note that “in a recent Supreme Court case, Justice Clarence Thomas argued that the reason why he thinks the Constitution places some limits on federal wealth taxes is to protect traditional state taxes on wealth and property.” So even one of the people on the Court who would wrongly claim that federal wealth taxes are unconstitutional has said that California’s wealth tax would pass muster.

I wish there were time and space available here to go through GGSS’s specific responses to various anti-tax arguments, but it would be a shame to spoil all of the fun. Just for a taste, however, I can note two further examples. First, they acknowledge that some other attempts around the world to impose wealth taxes failed to raise much money, but they explain that those taxes were riddled with loopholes, whereas the California tax’s design is similar to the successful, broad-based wealth taxes that continue to operate in other countries.

Second, in response to the claim that the tax will become permanent or will soon apply to non-billionaires, they explain why the high legal bars to enacting a wealth tax through California’s constitutional system mean that such “slippery slope” arguments are baseless. Any reimposition or expansion of the “tax beyond this would have to be enacted again either through a new ballot measure where Californians directly decide or through the California state legislature (with 2/3 super-majorities required in both the Assembly and Senate) and the Governor’s signature.” This is hardly a perpetual motion machine.

In legal academic circles, it is rare to be able to recommend a report that comes to a mere 13 pages yet can reasonably be called exhaustive. This is high-quality policy analysis from four top tax scholars, and we should all read and appreciate it.