In California, your stuff will soon be ours

If you live in California and are looking at this chateau, thinking, "That could make for a decent summer house for me," they are coming for your stuff. May I suggest you give a small percentage of your portfolio to me for "safeguarding"? // photo my own

Channeling their innermost Bernie Sanders and Elizabeth Warren, several California assembly members introduced AB-2088, a wealth tax on Californians.

If passed, it would impose a 0.4% wealth tax on individuals with a net worth of $30 million or more, or $15 million or more for married individuals filing separately.

Maybe they figured out how to solve the drawbacks of wealth taxes like how exactly to determine the value of items that are illiquid. 

Let's see how they did it:

50307. The Franchise Tax Board shall adopt regulations on the following subjects to clarify valuation methods.

Well, that's a hell of a punt. It does go on to talk about typical valuation metrics and mandates certain methods like comparable sales, previous sales, determining value growth, and such, often with additional text stating that the tax board "shall adopt regulations to specify...". However, while it does state that some assets are difficult to value, it more or less ignores that many items the rich own do not have any comparable sales. A rich family's custom-built house in the hills of Marin County designed by a starchitect does not have any meaningful comp to compare it to. In 2018, Sotheby's margin of error in their auction appraisals was around 38%, with the aggregate low end at $4.1 billion and the high end at $5.7 billion. Even still, 8-18% of the auctions ended selling at a price outside that range. On top of that, 20% of lots don't even sell at all, suggesting an actual value lower than the reserve price, often well below the bottom range of the appraised value. In other words, getting any kind of realistic valuation for art and collectibles is next to impossible until it is sold, and even that is only accurate in that one instance, to the one buyer. Further, art doesn't have any one set "value". This is proven in the auction house. Bidders will drop out at extremely wide ranges. Someone who can afford higher bids may stop bidding at $100k, but the bids may go up to $500k. This tends to indicate that the first person values the piece of art at $100k, but the highest bidder values it at $500k. But you can take it to the bank that the government will not be interested in any of the low range values that had been assigned to it throughout the bidding process. They would only be interested in the highest value someone placed on it. 

Don't think for a second that the government won't try to squeeze everything possible out of the value. As has been shown in the past, the IRS will value items in the millions of dollars even if the item is illegal to sell. I was able to auction off one of my photographs at a fundraiser for $280. Does that mean the modified version hanging on my wall at home is worth $280? Unlikely. The same photograph was raffled off at a much smaller fundraiser for far less than that action price in raffle sales. Is it worth that much? Who knows, but the government would almost assuredly take the higher valuation, given its extremely low liquidity.

Even very liquid assets are extremely problematic to figure out. Let's say a person has a net worth of about $30 million, to trigger their inclusion into this 0.4% tax, most of it in the stock market. The bill states that the valuation of publicly traded assets, like stocks, shall be assessed at the end of the tax year. Okay, let's invent some scenario for between the end of the tax year and the date the bill is due, April 15th. Let's assume...I don't know...some kind of event happens...and I'm just pulling things off the top of my head...a pandemic occurs in January or February. And the stock market tanks 40% in the following two months. He still has to pay the wealth tax off $30 million, even though his net worth just took a bath?

If we look just at the uber-rich, it doesn't get any better. Let's say Larry Page, one of the founders of Google, worth an estimated $70 billion, which I think is just his ownership stake in Google since he owns about 7% of Google with a $1 trillion market cap. So his wealth tax bill is $280 million. The market flips out in February and Google tanked 33% to its low in April. Do you think maybe liquidating $280 million of stock at around the same time would exacerbate the market? Do you think that maybe when all of the executives liquidate two billion dollars (or whatever it ends up being) of Google stock at the same time, it would create wild fluctuations in the market? Or look at volatile stocks. Elon Musk's Tesla has been valued at as high as $2000 a share and as low as $200 a share within the past 12 months, meaning Musk's net worth has fluctuated 1000% within the past year. How can anyone derive any kind of meaningful, objective tax from this?

It's easy to think those billionaires won't be affected at all by this. But what about the business owner who owns his own hospitality business and the ordeal puts him out of business? He likely has the vast majority of his net worth tied into his business, plowing nearly all of the money he earns back into it, hiring more people, leaving little to pay himself with. And he still has to pay the wealth tax valuation from December, despite losing almost everything? But if the pandemic hit three months earlier, he wouldn't have to pay any wealth tax? The bill as written now allows for deferring the tax liability, but it's unclear to me exactly what that means at this point.

Enforcement will also be a major issue. The bill states that people subject to the law must submit an accounting to the government. I think we're suddenly going to see many more people with a net worth of $29.9 million and much fewer $30.1 million. How can the government check? Violate the 4th Amendment and break into people's houses to see if they're hiding an original Rothko in their living room? Even if the violation is obvious and they get court authority to pore over a taxpayer's finances, it will take an army of accountants to verify all the offshore bank accounts, art appraisals, real estate appraisals, collectible appraisals, all real property, business valuations, etc. Even after all that, there will likely be several lawsuits a year contesting valuation metrics and variables. How accurate is the future earnings estimate and why is that specific benchmark used in the discounted cash flow model of that business? I can pretty much guarantee the politicians drafting this bill are significantly underestimating the cost of compliance the state needs to spend just to enforce this tax.

The hiding of assets will play a larger role than many of them think as well. The bill, in its description, doesn't appear to mention commodities or virtual assets like crypto. I suppose you can argue that it is covered under "other assets", but I don't see how that's not unconstitutionally vague. What if someone that is right around the $30 million threshold stores expensive wine in his cellar? Are they collectible or is he just a wine connoisseur that plans to drink the wine eventually? What about the items in a storage locker in a different state? The California tax board has no authority there. What about the safe deposit box in Switzerland? Hell, someone could probably figure out how to own several acres in Tuscany via a legal proxy without California officials really able to find out for sure.

In a brazen admission that high taxes do cause high wealth individuals to flee the state, the authors inserted a clause that would tax former residents that left the state within 10 years prior. The constitutionality of this is extremely dubious. I'm sure other states would love California taxing their own residents and wouldn't file lawsuits against California. I don't know if these assembly members know this, but California is already pretty well hated throughout most of the rest of the country. This doesn't help.

Social Democrats like Bernie Sanders and Elizabeth Warren who had their own wealth tax schemes during the presidential primaries, love to point to Scandinavia. Okay, let's take a look at what they did over there. Sweden, Denmark, and Finland all used to have wealth taxes, but they repealed them. Norway still has wealth taxes, but they had significantly scaled it back in recent years. The common thread of the repeals has been: Lower than expected tax revenue, higher than expected enforcement costs, and the rich expatriating from the countries or otherwise taking measures to hide wealth. In France, a country which probably more resembles the Social Democratic vision than the Scandinavian countries, saw 10,000 people with a combined 35 billion Euros leave the country over the wealth tax in the 15 years of its existence, with some economists like Eric Pichet estimating much higher numbers. Pichet estimates that the wealth tax in France took in 3.5 billion Euros, but lost 7 billion Euros in other taxes due to capital flight. France repealed its wealth tax in 2017.

You may say, "Screw the rich, it don't affect me none," but the Federal Income Tax also started as a tax on the rich. Incomes below $3000 in a year was deducted for those filing individually and taxes scaled up from there with the next bracket coming in at $20,000, adjusted for a conservative account of inflation, at least half a million dollars today. Inflation calculations vary wildly depending on the metric. The article states that $3000 in 1913, on the low end, is a little more than $52,000 today using GDP Deflator, which seems way too low to me. On the high end, using the dollar as a percentage of the overall economy, it would be worth more than $1 million, which seems way too high. More instructive is to look at wages. Union wages in 1913 were around 20 cents to 50 cents an hour. If they worked 50 hours a week, which was more common then, that's a little over $500 a year to $1300 a year, significantly less than where wages start getting taxed. Median union wages today are almost $57,000 while today's standard deduction is a piddling $12,000. The lowest tax bracket in 1913 was also just 1% while the lowest tax bracket today is 10%. Getting the voting population angry about one group to make them pay nearly always comes back to haunt us all. And if California's experience, where capital flight is easier, is similar to France's, what's the point of all this, just to lose tax revenue?

I remember when the left used to try to justify taxes with claims of all the services the government would provide that were "essential" to businesses. How do you possibly justify this tax that could very well be imposed on someone who made his millions in another state and moved to California a few years back to retire? California government services would quite literally have had nothing to do with that person's ability to earn his money. Now, it seems that the only justification is "Gimme your stuff! I want it!"

I'm sure Joe Rogan who recently fled California for Texas in no small part over California taxes would not be thrilled to hear about this wealth tax that could follow him around no matter where he goes. Maybe Gavin Newsom can pull an Andrew Cuomo and beg the rich to come back to California.