Taxing the Wealthy: A Tale of Two State Propositions

As Democrats and Republicans across the country fought over control of Congress in this past midterm election, progressives in Massachusetts and California continued with one of their favorite pastimes: trying to raise taxes on the rich. In Massachusetts, voters were presented with a proposal to add a 4.00 percent tax on annual incomes above $1 million in addition to the state’s current flat tax of 5.00 percent. In California, Proposition 30 aimed to establish a 1.75 percent tax on annual incomes over $2 million.

The Massachusetts proposal passed while Californian voters rejected Prop. 30. Taxes are harmful, especially when they penalize those producing the most value in society. But some progressives are even starting to drop the pretense that taxing the rich is meant to help anybody. So, what can be done to effectively oppose tax increases? The answer may lie in the differences between California and Massachusetts and in how the respective tax hikes were presented to voters.

Taxation is, by its very nature, the violent seizure of wealth. That alone is enough to invalidate any proposition to tax a group or activity. But economic theory also teaches us about the consequences of taxation. And those consequences are bad enough to further disparage the argument for higher taxes. On a society-wide scale, taxing high incomes is particularly destructive. In many ways, the call to raise taxes on high incomes could be better understood as a call to raise taxes on the most productive.

The fact is that businesses and people acting on the free market do not possess the legal ability to acquire wealth by force—that is, to tax. The only way to make money on the market is to offer a good or service that people will freely choose to pay for. Just as losses and pay cuts signify a business or individual’s failure to provide sufficient value to their buyers, profits and high incomes are a consequence of providing real, tangible value to consumers. And just as a tax on cigarettes penalizes smokers, a tax on high incomes penalizes those producing the most value for the most people.

Poverty is the default human condition. And the productive engine of a free market grounded in private property rights is the only means for a society to move beyond poverty. Using the coercive means of government to redistribute existing wealth cannot make a society better off. In fact, it is a destructive force that leaves society poorer. Future production is discouraged, and resources are siphoned out of the private sector. Even on an individual basis, any benefits the poor come by through government subsidies are dwarfed by the benefits that have resulted and will result from the production of goods and services carried out in the search for profit.

One place where many free marketers go wrong is in simply advocating against so-called progressive taxes—higher tax rates for the rich and lower tax rates for the poor. But as Murray Rothbard points out in chapter 4 of Power and Market, it’s the level of taxation that matters, not the shape of the distribution. In other words, if Massachusetts had still chosen to transition from a flat to a progressive tax, but their method for doing so was to cut taxes on lower-income earners, that would be an improvement. It’s raising taxes that’s the problem. The fact that it’s on higher earners will just compound the problem.

Interestingly, some progressives and social democrats have dropped the argument that taxing the rich will yield any tangible benefits for society. Instead, they argue that billionaires shouldn’t exist. Although they attempt to frame their arguments as appeals to fairness, they often come off more as expressions of envy. Distinct from jealousy, envy is the desire to make everyone worse off to address some perceived unfairness. If you see your neighbor’s expensive car and want one for yourself, you’re experiencing jealousy. If you want to destroy your neighbor’s car to make yourself feel better, that’s envy. It’s a nasty emotion, but it’s part of the human condition all the same.

Throughout history, the free market has been one of the few spheres where success could be measured directly. As such, merchants and businesspeople have frequently been the subjects of envy despite producing all the wealth society now relies on. Few classes are more envious than intellectuals. They perceive themselves as smarter than merchants, and yet they struggle in comparison to find patronage for their scholarly services.

The political realm has allowed intellectuals to expropriate the compensation they think they deserve while granting them the means to act on their envy of the business classes. The fervor seen among college professors, public intellectuals, and ideological politicians for taxing the rich and abolishing billionaires is the modern rendition of this historical cliché.

So, if agreement on the destructive nature of taxation is not enough to stop the push for higher taxes, what would work? Perhaps an answer can be found in the recent ballot initiatives in California and Massachusetts. Both propositions were similar, with slightly higher tax rates for annual incomes in the millions of dollars. Back in July, nearly two-thirds of Californians supported the tax hike. But on election day, that reversed, with nearly two-thirds voting against it. What can explain that shift?

Well over those few months, a coalition of businesses, interest groups, and even Democratic governor Gavin Newsom campaigned aggressively against Prop. 30. Their method was to highlight the cronyism behind the initiative. The tax hikes were being sold as a way to help the state fund its attempt to transition away from fossil fuels. Notably, the California Air Resources Board recently passed a proposal to ban the sale of gasoline cars by 2035.

In response, the ride-sharing company Lyft spent $45 million lobbying for the Prop. 30 tax hikes as it would help subsidize the higher costs their drivers faced when transitioning to electric cars. Newsom and the opposition successfully characterized the proposition as an attempt by Lyft to use the tax dollars for their own benefit, as can be seen in this ad.

Conversely, Massachusetts voters were only told the money raised from the new taxes would fund education and transportation. All the same cronyism was at play as the unions who stood to benefit lobbied in favor. But that was hidden behind vague language about services most people agree are good in the abstract. While the intellectuals of the laptop class may be driven by envy, most voters and taxpayers are more interested in not being ripped off. And when effectively presented with the reality that the tax dollars would be used to benefit a politically connected company, taxing the rich fell out of favor.

At the same time, there appears to have been some apprehension in California about inflicting more taxes on a wealthy class who is already fleeing the state in response to its high income taxes. It’s much harder for governments to trample on someone’s rights if they can get their rights back by just moving a hundred miles east. A Harvard Kennedy School professor told Vox Prop. 30 would have to happen at the Federal level. Discourse like this lends credence to the argument that radical decentralization and smaller government territories put a cap on government infringements such as taxes. Imagine if one only had to move five miles.

We know from economic theory that taxes have a destructive effect on the economy and, therefore, on the well-being of everyone in society. The fact that proponents of higher taxes are starting to accept this and still push for higher taxes signals the need for a change in argument. The rejection of a tax increase on the wealthiest Californians in this election supports the case that a focus on cronyism and a push for radical decentralization is the most effective way to limit and even cut the taxes imposed upon the rich and on everyone else.