By David L. Bahnsen
Wednesday, December 09, 2020
Media coverage of San Francisco’s recent passage of a
citywide “wealth tax” has been hard to come by, to say the least. One can be
forgiven for wondering if leftist media outlets even see the writing on the
city’s wall. It is not just that this bill will do little to provide additional
net revenue to a city facing financial ruin; it is that this bill will surely
do the exact opposite. Even critics of modern income inequality see policy
prescriptions such as this as counterproductive. Indeed, in the present
COVID-19 moment, San Francisco needs all the help it can get to attract
businesses and well-paid taxpayers. This couldn’t come at a worse time.
So, what is this new tax? Supporters call it the
“overpaid executive tax.” (Kudos to them for framing so bluntly.) Technically,
the citywide tax will operate as a levy of at least 0.1 percent on companies
that pay their CEO more than 100 times the median pay of their workforce. That
0.1 percent tax can reach as high as 0.6 percent depending on how far above the
company’s median pay the CEO’s total compensation is. Embedded in the name
attached to this new legislation is the belief that disinterested third parties
should determine fair and appropriate pay. Whether that be city bureaucrats or
voters unconnected to the company in question, the notion that such actors
should serve as the arbiters of proper pay levels is nothing more than a form
of price-and-wage control. An easy retort to my concern here may be, “Why care
about a mere 0.1 percent hit?”
Well, if what we are seeking to address is really egregious,
unfair, socially contemptible income inequality — robber-baron stuff — why
should we stop at 0.1 percent? In other words, if the rationale for this 0.1
percent is what its proponents say it is, why are we only talking about 0.1
percent? If a Silicon Valley tech billionaire makes an amount considered to be
unfair relative to the money paid to, in all probability, administrative
support staff, shouldn’t voters and bureaucrats up the ante here, seeking far
more than a 0.1 percent surtax?
The fatal flaw of this bill and others like it lies in
the idea that fair compensation should be defined by people other than those
who have skin in the game — namely, a company’s principals, board of directors,
and ultimately the shareholders to whom it reports. Once one concedes the
principle that legislative intervention is required to force those within a
company to change the way it pays people, the door is opened to an arbitrary
exercise of power. Make no mistake: There is no magic behind the 0.1 percent
figure. Setting the tax at that level was arbitrary, and arbitrary judgments
are easy to change. Sure, it remains there today, but perhaps 1 percent or 5
percent will be the “right” number next year. And perhaps even higher the year
after that. The lack of limiting principle here is frightening, and the
slippery slope is easy enough to see.
Making it all the more dangerous is that San Francisco is
already on the slide. The wealthy are leaving the city in record numbers and at
a record pace. And unlike many of the wealthy in New York City still waiting
out the pandemic from their beach houses, the San Francisco defectors are not
coming back. The very nature of the largest businesses in San Francisco makes
them tech-forward, not just able to take advantage of different work
environments, but rewarded for doing so. Throw in the recent increase in the
transfer tax on expensive real estate in the city, and the slew of recent
business tax increases embedded in Proposition
F, and there is almost no confusing the message the city is sending to
wealthy businesses and their proprietors: Your kind is not wanted here.
This brings us back to the key practical problem faced by
those who want to soak the rich in a city or a state. In a country that allows
mobility, there is no reason for a wealthy employer to stay in inhospitable
business environments. San Francisco’s new wealth tax seeks to address that by
saying businesses must pay the 0.1 percent tax if they have any office presence
in the city, even if they are not headquartered in San Francisco. Why quit
while you’re behind? Force company headquarters out, and their satellite
offices too.
Every day brings a new headline of high-profile companies
and executives leaving the Golden State. The 13.3 percent top state tax rate is
punitive enough. The regulatory environment is infamous. And while tech company
CEOs may not mind the stratospheric price of real estate, their employees
certainly do. What a COVID-damaged city such as San Francisco needs is to plead
with Sacramento to decrease taxes and regulations, so that its city can retain
major revenue contributors. Instead, it has chosen to add insult to injury by
adding to incentives to leave the state, and even more inexplicably, by
encouraging those who stay in the state to do so just outside the city. That’s
right — San Francisco may not just push successful tech companies to Denver and
Austin — they may even push them to Palo Alto!
And while we’re discussing this sort of approach to
taxation, it’s worth adding that a true wealth tax on the balance sheets of
ultra-high net-worth people does not work. As
I wrote back when Elizabeth Warren raised the issue during her presidential
campaign, the rationale is misguided, the legal propriety is dubious, the
amount of money it raises is over-stated, and the misallocations of capital
that it creates are significant. San Francisco’s modified version of a wealth
tax is equally misguided. It will lead to diminished revenue as more businesses
leave the city, and even more on top of that as new businesses seek a more
friendly neighborhood in which to start. Income inequality is not solved by
making poor people poorer, or by making them unemployed.
San Francisco would be wiser to pursue what it is
chartered to do as a city — addressing high crime and homelessness — rather
than what it is inherently incapable of doing — serving as the arbiter of what
wages should be. So far, it is not doing either very well.
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