www.latimes.com/california/story/2024-05-13/column-stop-complaining-about-californias-tax-system-fix-it
Lots of complaining about California's tax system. Time to fix it
Everyone going on about prop 13 must've only read the title. Because it's never mentioned in the article once.
This is an article about income tax, and the broken parts of that system are far larger than prop 13. Just not as popular of a subject right now so everyone wants to ignore it and focus on a current buzzword.
Go ahead and reform prop 13. But it's not relevant in regards to the discussion on the article were all posting under. If the author was here, they would ask "did you even read what I wrote?"
To add to this (because I did read the article as well), property taxes doesn’t affect the state budget at all (what the article is talking about). 100% of property taxes go to local county/city governments.
This is nitpicky so its not really a counter to your statement, just a "um, Actually" of the "100%" claim. which I disagree with overall anyway but
Prior to 1912, the state derived up to 70 percent of its revenue from property taxes. The state no longer relies on property taxes as its primary source of funds—since 1933, the only property tax directly levied, collected, and retained by the state has been the tax on privately owned railroad cars.
https://www.boe.ca.gov/proptaxes/pdf/pub29.pdf
I assume the 1912 change occurred something to do with the 16th amendment passing in 1913.
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Which is correct! Well done, so far the only response worth reading.
It’s an opinion piece to be honest. Not a news article.
And I think the arguments posed is that prop 13 is the reason why we have a broken income tax system and only has become exacerbated as time has gone by. It is used to shore up the local funding that becomes more and more deficient since prop 13 has passed.
That’s the hard part. No one, even Newsom, wants to fuck with prop 13 because it helps all the older folks that have been in California for a while hike and those folks always come out to vote. Always! That is why the problem will never get fixed or won’t get fixed with career politicians.
It is used to shore up the local funding
Local funding has already been shored up. Localities on an inflated adjusted basis have more now than they did before Prop 13. We added utility taxes, hotel taxes, sales taxes, etc.
This is wrong per LAO report, still 20% below.
and yes, we increased regressive taxes to subsidize the property owners.
Per capita numbers don't matter because no everyone is a taxpayer, and the taxpayer mix has changed since half a century ago. The next paragraph in the report says that "Overall, California Local Revenue Increased". You can try to parse out the metric to fit your views, but the truth is that overall funding increased even when adjusted for inflation.
revenue rose from roughly $2,600 per person in 1977 to roughly $3,440 per person in 2013 (adjusted for inflation)
The idea that increased property taxes are the ideal way for the government to get money from exactly who is most capable of giving it, is 20th century thinking.
Per capita numbers don't matter because no everyone is a taxpayer,
False. Everyone pays property tax, either as the property owner or as a renter thru their rent.
and the taxpayer mix has changed since half a century ago. The next paragraph in the report says that "Overall, California Local Revenue Increased". You can try to parse out the metric to fit your views, but the truth is that overall funding increased even when adjusted for inflation.
1) Oh, did you forget the next sentence that when compared to local government across the U.S the increases have not kept up with the U.S as a whole? The increase in local California revenue is about HALF what the rest of the U.S has experienced. It's no wonder the state level, and therefore income tax payers have to step in to pay for major expenses.
Inflation adjustment alone is not enough to maintain spending power parity. Local Government responsibility is far greater then then simple basket of goods measured by CPI. This doesn't even take into account the Higher Cost of Living that is inherent to California relative to the U.S
2) Yes, we replaced taxes with massively increased impact fees (~2.5-3x) and other fees. One time fees which bring major up front costs to projects and slow down construction and development. This means that there is less housing in California as a result there are higher prices for new property owners -- who subsidize older property owners.
3) So, ok, I'll give you that CPI adjusted figures have risen above 1978 levels. Through shifting of revenue from stable property tax and shifting that burden onto younger home owners and massive up front fees which slow down development. Revenue however have not risen to match actual costs, as evidenced by our local government peers around the nation and the fact that we do in fact rely on income taxes to fund local responsibilities.
We are absolutely still down in California's local government's ability to cover local responsibilities. Again, this is only partially made up due by shifting that burden onto younger home owners and with massive up front fees which slow development, further contributing to our housing crisis.
The idea that increased property taxes are the ideal way for the government to get money from exactly who is most capable of giving it, is 20th century thinking.
It was quite literally the top level recommendation in the bipartisan tax report you yourself linked to as recommendations for tax reform.
It was quite literally the top level recommendation in the bipartisan tax report you yourself linked to as recommendations for tax reform.
I'm afraid you've misread that document much like you've misread the LAO analysis.
Recommendation One: Reduce and restructure the personal income tax.
Recommendation Two: Eliminate the corporation tax and the franchise minimum tax.
Recommendation Three: Eliminate the state general purpose sales tax.
Recommendation Four: Establish the BNRT. Recommendation Five: Create an independent tax dispute forum.
The idea that we can wholesale increase taxes on everyone in California, some extremely dramatically (by repealing prop 13) is not supported by any economic study or policy advocacy group that has studied the outcomes. No one seriously is suggesting it except extremists without any economic background.
I'm afraid you've misread that document much like you've misread the LAO analysis.
I have not misread the LAO analysis. I note you did not dispute what I said.
Recommendation One: Reduce and restructure the personal income tax.
Recommendation Two: Eliminate the corporation tax and the franchise minimum tax.
Recommendation Three: Eliminate the state general purpose sales tax.
Recommendation Four: Establish the BNRT. Recommendation Five: Create an independent tax dispute forum.
Ok, fine, I looked again, and although your link says
Under the improving the tax system section
"I. Improve Revenue Stability: California’s tax system should be restructured to alleviate revenue peaks and valleys. Economic and institutional changes have led to increasing instability in California’s revenue stream:
Shift in the tax base. The state has shifted from relatively stable revenue sources such as the property and sales taxes to the more inherently unstable, steeply progressive personal income tax (PIT)
I concede, you are correct, the recommendations say something different.
Those recommendations however, are... interesting. They basically eliminate a large fraction of taxes... and then replaced them with a business net receipts tax and suggests it would replace all the revenue lost. I looked for the calculation but did not immediately find it. Does a tax like this exist anywhere in the world? If not, I hardly blame anyone from not implementing that.
The report itself says "Despite the Commission’s work, the BNRT’s far-reaching ramifications have not all been fully addressed and should be carefully analyzed and considered by the Governor and the Legislature"
Generally, I would say this leaves idea of addressing the volatile income tax base by returning in part to a more stable tax base -- property tax. It's in line with the reports findings.
The idea that we can wholesale increase taxes on everyone in California, some extremely dramatically (by repealing prop 13) is not supported by any economic study. No one seriously is suggesting it except extremists without any economic background.
Notice I did not say we should do that. I am detailing what prop 13 has done. It has definitely helped contribute to us over relying on on personal income taxes to fund our state and it has helped contribute to our housing crisis through its downstream effects. The responsibility can has been kicked so far down the road for so long on the fundamentally unfair taxing from prop 13 that we have no choice but to keep Prop 13 for primary residences. It's not fair, but it's what's possible without inviting massive chaos.
No one, even Newsom, wants to fuck with prop 13
Thats not true. he was a proponent of Prop 15(2020) which only failed by a slim 2%. And it likely would've passed had it not been 2020.
That proposition is classic of how hard overturning even the spirit of prop 13 is. That had to deal with commercial and industrial land, not even residential, and it didn’t pass, because, “they will come for our homes next”. That’s probably the closest a politician could get to supporting some repeal of prop 13, dealing with commercial and industrial zones and not residential.
you could perceive it that way but my view has been it was a confusing and turmoiled year where everything was destabilized.
students that could've voted in California were in stuck at their home states, old people or parents(fearful for their childrens' health) couldn't go to a voting booth, lots of people were doing mail in ballots for the first time. And from what I'd seen all of the organizations that normally would have held town halls and been on the corner advocating/campaigning for this or that were forced to do impersonal phone calls and confusing/ignored mail pamphlets. The rich and wealthy have money for tv and online ads, progressive groups only succeed personally, explaining nuance. I think in a rematch it would win.
It would be interesting if there was a rematch. I totally forgot about the proposition. Kinda like what you said, it was a confusing and turmoiled year, and there was another election news story that dominated and still dominates. lol
Why are you mentioning this? That wouldn't contradict my comment.
Prop 13 is the reason why our income tax is so broken.
When prop 13 passed in 1978 it decimated local revenues. Which led to a decimation of funding for local k-12 schools. The state stepped in provided a TON of money to rescue schools. It still provides the majority of funding for local schools to this day.
It's a HUGE amount of money, a significant fraction of the total state budget. Guess who pays for that? Income taxes.
Because of prop 13, Elder home owners have been skirting their local responsibility for decades and instead pushed the local tax burden onto higher income earners in the form of increased income taxes.
Our boom and bust tax revenue is in large part because prop 13 subsidizes elder home owners and forced California to rely on income taxes.
Prop 13 is the reason why our income tax is so broken.
No, it's just not.
uh huh, and, so why am I wrong?
All taxes lost under proposition 13 have been made up by other increased revenues.
Schools getting the majority of funding from the state is a GOOD thing and reduces inequity in funding.
California needs a sovereign wealth fund to anchor (or a much larger cushion account) to steady the tax stream and multiyear state budgets should be adopted.
All taxes lost under proposition 13 have been made up by other increased revenues.
1) Yea, No, that's false. Those revenues have not been fully made up on a per person basis.
2) And let's be clear per latest LAO report, property taxes adjusted for inflation per capita are still significantly below what they were before prop 13. ~20%
3) Total local tax revenue has been partially made up by increasing fees on everyone else and increasing the highly regressive sales tax, vehicle licensing fees, Utility Taxes, and other fees by 600%! . We increased taxes that are burdensome for the poor in order to subsidize those benefiting from Prop 13.
Subsidizing long time home owners and corporate real estate is one of the reasons why we have the 8th highest sales tax rate in the nation, one of the highest income taxes and biggest housing shortages.
Schools getting the majority of funding from the state is a GOOD thing and reduces inequity in funding.
To a degree yes, it is a good thing to reduce inequity in funding. But it is still a straight subsidy prop 13 subsidy. That money has to come from somewhere, and it has pushed those taxes into sales tax and income tax. Sales tax is regressive for the low income, and the highest tax bracket is artificially high in order to subsidize people who benefit from prop 13.
California needs a sovereign wealth fund to anchor (or a much larger cushion account) to steady the tax stream and multiyear state budgets should be adopted.
Or, we could just do the split roll and stop subsidizing big property owners like Disney land, Irvine company, big hotel chains and big land lords. That alone would stabilize our revenue stream significantly.
I'd take no property tax over Prop. 13 but, still, Prop. 13 isn't such a bad deal for taxpayers. After all, property taxes are more difficult to legally avoid compared to income taxes.
The only tax problem I see in California is with the sales tax. I'd like to see that much lower as that's probably the tax that is the most difficult to legally avoid.
Prop 13 fits California tax structure perfectly. It’s a progressive style tax that uses time instead of money.
The thing to teach people about taxes in California is that they are NOT meant to be fair for everyone at all times. All Progressive taxation works like this.
it is relevant. Repealing prop 13 for everything but primary residence will give state much more predictable and reliable tax source. It will make tax collections less dependent on stock market swings. With this added predictability the state can better plan for income tax reform (like removing tax on first $100K). Tax reform must be a comprehensive approach condidering revenues, incentives it creates and all sorts of second ordrer effects.
We need COMPETENCE from the gov for once.
Repealing prop 13 for everything but primary residence will give state much more predictable and reliable tax source.
Property taxes fund local governments only. It doesn't go directly to the state. So, no, it wouldn't.
Most gov effort at every level (schools, police, roads, etc) are funded by a combination of sources. Yes, often one source dominates, but often it is a very diverse mix of sources as it should be.
When counties and cities have budget shortfalls it's often up to the state to fill the gaps through increased block grants. It absolutely impacts the state. It just shifts the burden. A significant portion of the state budget is dedicated to education simply because local property tax revenue ISN'T ENOUGH.
Yes, it in fact would.
Your proposal about removing tax on the first $100K is interesting. I suppose that would turn it into a game to figure out how a wealthy person can get his taxable income below the $100K threshold. Fortunately, there is a lot of planning with deferral, trusts, etc., that one could use.
I think you'd have a lot of tenants complaining about your Prop. 13 idea. After all, a lot of second (and third and hundredth) residences are rental properties. Any tax increase is going to get passed along to the tenants.
the only proper way to address housing costs is by building more. Again very simple - if there is not enough supply nothing on the demand side (like rent controls or subsidies or incentives, whatever) will make matters better.
We agree on that.
Democrats and Republican's put together a bipartisan commission on how to address the swings in taxes in 2009. Since then, Democrats in the legislature ignored their advice and we haven't taken up tax reform since then.
Since then, Democrats in the legislature ignored their advice and we haven't taken up tax reform since then
Gonna say this ain't exactly true. They've tried, but successfully ending prop 13 didn't happen.
Per the report, the number one recommendation was to shift the tax base to something stable, like property tax and sales tax.
Section Three: Improving the Tax System
- Improve Revenue Stability: California’s tax system should be restructured to alleviate revenue peaks and valleys. Economic and institutional changes have led to increasing instability in California’s revenue stream:
- Shift in the tax base. The state has shifted from relatively stable revenue sources such as the property and sales taxes to the more inherently unstable, steeply progressive personal income tax (PIT). One cause of this shift is the relative decline of the sales tax base.
The number one recommendation. Shift the tax base back to stable source like property tax and sales tax. Democrats have tried both things. Failed at split roll for prop 13. Sales tax has increased further( although that is regressive). Much higher then it was in 1978 -- again, because property taxes were cut.
Needs to be more real estate focused than income focused.
My proposition is you don’t benefit from prop 13 if you don’t do your taxes in California.
After your 2nd home real estate tax goes up to 2.5% of current value. This will free up more housing from greedy families and Airbnb hosts. Try to close all primary loans loopholes.
It will bring more money back to California and more money from real estate and open up some more housing. Not a ton but more.
Small measures that don’t effect anyone struggling and there’s billions in benefits.
I would be onboard with this. This doesn’t impact normal families and would specifically targets corporate/investor landlords like Black Rock. Also I agree that with gradual change, most businesses/interest groups wouldn’t probably fight it (which usually kills any reform attempts).
But what about my parking!
The commenter's proposal wouldn't do anything other than raise rents on tenants. Any additional cost from property tax is going to be passed along from the corporate/investor landlords to the tenants.
I agree with this as well. This is also why I don't support fully repealing Prop 13, because this will hurt the entire middle class.
Landlords will just pass on the additional taxes to the renters, because that's what capitalist society does.
But I'm genuinely curious on what a reasonable solution would be that would work for all.
I think what is needed is more building, particularly in undeveloped areas. I'm not sure if there's really a "solution" to the fact that California is overall a desirable place to live and thus property values are always going to be on the expensive side. I do think that increasing supply, especially where consumers want to live and where there will be less local opposition to building, would improve the situation to some degree.
Landlords will just pass on the additional taxes to the renters, because that's what capitalist society does.
Who do non-capitalist societies pass the costs along to?
This is an example of how there are so many ideas of how to reform something that the most likely outcome is that nothing gets done. My personal preference would be to repeal the property tax and income tax in California entirely. The state takes in too much revenue and spends too much on programs, in my opinion.
Your idea about requiring California tax nexus would be easy to work around because it would be very easy for a nonresident who owns property in California to get just enough of a connection with the state that he files a tax return but owes zero in income tax.
As always, the question is less about the type of tax law that is implemented and more about how to legally avoid it.
There are a ton of programs the state could lose and no one would notice. I definitely think it’s possible to adjust the property tax to where you can eliminate the income tax. Higher property taxes also mean lower house prices usually which means easier buy in for first time home owners.
I agree on all counts. In terms of revenue collection, any tax can substitute for another tax.
Higher property taxes generally mean lower house prices but they also mean higher rents. I know that there is a lot of concern about how much it costs to rent. If these first time home buyers are having to pay more in rent due to higher property tax, it's probably going to take them longer to get the money together for a down payment to buy a place.
In most states yes but California rents are stretching people so thin if they raise them anymore no one can qualify.
Are you sure about that? It's a serious question and I want to tell you why I'm asking. If rental costs are increasing, and the data indicates they are, then it must be true that demand is still exceeding supply. If so, it seems that there is capacity for a price increase. I'm wondering if you have any disagreements with these observations.
I have a second question for you. If property taxes are increased, what do you expect that landlords will do: (a) absorb the increase in cost and take a lower profit; or (b) build the additional cost into a current or near future rent increase? To be clear, I'm asking how you think this plays out in the real world.
None of these Bills are one liners. There are a lot of nuances put in there. 28% of rentals are owned by landlords whom have 20+ units under their name. Thats roughly 130,000 homes. You raise the taxes on those units they will sell and invest elsewhere.
This is exactly what happened in Singapore. In Singapore Your primary house is 0%. Second home 20% and 3rd and above 30% rate. LED to investors owning a lot less housing and primary owners moving in to them.
They also have a high property Foreign tax when foreigners buy a home.
Aggressive taxes like this give back homes to middle and lower class Californians whom just want a primary house.
https://www.propertyguru.com.sg/property-guides/additional-buyers-stamp-duty-guide-13034#
I'm glad you brought this up because I think it raises some important considerations. U.S. law and Singapore law obviously are very different.
Generally, U.S. law (including state law based on Constitutional provisions applied to the states and within state constitutions) prevents the type of discrimination you are advocating.
In general, if we're comparing two condo units in a building that have the same characteristics, the taxing jurisdiction can't tax one differently from the other based on the identity of its owner(s). In other words, if we have two identical condos where one is owned and occupied by a single individual, it must be taxed the same as the other condo that is owned and occupied by a gigantic out-of-state corporation. The general sources of law that cover this area are the Equal Protection Clause and the Commerce Clause. The Privileges and Immunities Clause can also apply in the case of non-corporations (e.g., a landlord who owns a lot of units as a sole proprietor).
We can dig into the law, including case law, if you like. Also, keep in mind that where a state can find a legally permissible way to attempt to impose an additional tax, there are often ways to legally structure the property ownership to avoid it. I'm pleased to discuss specific provisions. The fact pattern that you provided above - i.e., raise taxes on landlords who have 20+ units to their name - would be highly unlikely to survive a court challenge and should also be relatively easy to structure around to avoid the tax in the event it were upheld as a valid tax.
this would make rent much higher. those taxes are just going to be passed on to renters.
Other states yeah. They really can’t increase them much more and have renters that qualify at the moment.
Yes, repealing Prop 13 for 2nd homes would make it cheaper for people to buy instead of rent.
So what's the downside?
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For all those crowing about Prop 13 (which isn’t even mentioned in this article) here’s a deal for you. Abolish Prop 13 in exchange for abolishing state income tax.
yes, repeal prop 13 for anything but primary residence. Also, don't (state) tax first 100K. easy, thank me later.
I’ll thank you now sir or madam.
But I love taxes! I vote yes on every one, every single time! \s
Cutting taxes on top earners is the last thing we should be doing. If anything they should be increased. The rich do more harm than good in society simply by existing. Even if we took some of their money and burned it the economy would be healthier. Using it for public services is a no-brainer.
That said, volatility is an issue here. Why not have the tax be based on a rolling average to even out some of this volatility?
The rich do more harm than good in society simply by existing. Even if we took some of their money and burned it the economy would be healthier.
Not sure I understand you. Can you give me an example?
Let's take Jeff Bezos. In Nov 2021, Amazon stock was at ~$180/share, making Bezos incredibly wealthy. By Dec 2022 (a year later), it was down by more than half, making Bezos much less wealthy.
In that year, how did Bezos losing vast amounts of wealth make the economy "healthier"? How did it affect your life?
Since Dec 2022, the stock price has rebounded and is now at an all time high of $187, making Bezos incredibly wealthy again. Same question: how has this been bad for the economy (making it less healthy), and how has it impacted your life directly?
Well, it depends on the exact behavior Jeff Bezos pursues and what my needs are. As individuals in a larger society, his direct effects on my well-being are not especially obvious. But they are there. And keep in mind that I am speaking of relative wealth here—Bezos’s fluctuating wealth only matters in in relation to the purchasing power of ordinary people. If our purchasing power also declines, then we are no better off then before.
But, fundamentally, ordinary people are competing for resources against the ultra-wealthy, and their incredible wealth means that even a tiny inconvenience for them will be valued higher than life or death for me.
Now, free-market ideologues like to imagine that Jeff Bezos’s wealth is only being used to produce more goods that can then be used to meet my needs indirectly. And there is some truth to this. Certainly the economy is pretty good at providing me with adequate food, clothing, and other inexpensive mass-produced goods. The fact that Jeff Bezos can buy a wardrobe far more expansive and showy than mine is not a major problem for me. If he consumes more clothes, the cost of clothing may come down due to economies of scale and I may even benefit from his purchases.
However, this is not the only type of need I have. There are other human necessities and services that are more fundamentally limited. For example, land in cities is fundamentally scarce. I cannot afford to live in San Francisco or Manhattan because the ultra-wealthy have bid up the price beyond what I can pay. Even more critically, the rich can purchase vast amounts of human labor—in fact, this is the basis of our current economy. The majority of people work in service to the wealthy, and the rest of us are left with scraps. If my community wants to build a train line, there is no way to do this because materials and labor are monopolized by projects that benefit Bezos and members of his class. Political power works similarly. Sure, I get a vote, but do I really have the same say as Bezos does? The answer is obvious, and this contradicts the ideals of democracy as well.
Ultimately, markets as a means of maximizing human well-being can only be justified if purchasing power is relatively equal between people. It is unjust to spend millions entertaining Bezos with space travel while other people are literally dying from lack of resources. As long as the ultra-wealthy exist, this problem continues. Which is why I think their wealth must be redistributed or dismantled.
But, fundamentally, ordinary people are competing for resources against the ultra-wealthy,
Not really. And in a situation like Bezos, he has given me far more resources than he could have possibly (even theoretically) taken away from me.
For example, land in cities is fundamentally scarce. I cannot afford to live in San Francisco or Manhattan because the ultra-wealthy have bid up the price beyond what I can pay.
The problem isn't that the ultra-wealthy live there. The problem is the number of people that want to live there. If there are 100 houses in an area, and 500 people want to live there (each in their own house), then 400 people aren't going to live there.
Which is to say, even without the "ultra wealthy", there are almost certainly enough regular wealthy people that you wouldn't be living in those places anyway. Obviously I don't know how wealthy you are, so that's just a wild guess.
Even more critically, the rich can purchase vast amounts of human labor—in fact, this is the basis of our current economy. The majority of people work in service to the wealthy, and the rest of us are left with scraps.
They can only "purchase" the human labor if the humans are willing to sell it to them for their own benefit.
The majority of people work in service to the wealthy, and the rest of us are left with scraps.
When someone offers to pay you to do something and you agree to do it, you are not "working in service" to them. You are simply doing a job. It is no more noble to work for a poor person than it is to work for a wealthy person.
If my community wants to build a train line, there is no way to do this because materials and labor are monopolized by projects that benefit Bezos and members of his class.
That is not true at all. First, a market with limited (or one) buyers is a monopsony, not a monopoly (that's a market with limited sellers). Second, there are millions of employers; it's one of the most competitive markets. There are millions of businesses in the US.
If your community wants to build a train line and can't, it's not because of the "ultra-wealthy."
Sure, I get a vote, but do I really have the same say as Bezos does? The answer is obvious, and this contradicts the ideals of democracy as well.
Sorry, that's human nature. If you were able to magically redistribute wealth, you'd still have power brokers influencing politicians. That happens under any economic system and condition. It's not because it's a problem of the "rich."
It is unjust to spend millions entertaining Bezos with space travel while other people are literally dying from lack of resources. As long as the ultra-wealthy exist, this problem continues. Which is why I think their wealth must be redistributed or dismantled.
This is a fallacious argument. You can tall that, because it also applies to government projects (it was a common criticism of the space program in the 1960s.) Even today, you could ask why Caliornia is trying to spend $100b+ on a train when there are still poor people in the state (most of whom are never going to ride that train).
At least with the "ultra wealthy", most of them have their wealth because they have ownership in companies that provide massive benefits to people, including poor people.
The question I have is: what is the specific plan to tax the wealthy. I'm a very well-off (some would say wealthy) taxpayer and I understand that new tax legislation and regulations will be enacted from time to time. I have little influence over that as I only have one vote. The big deal for me is how to legally avoid the new tax such that I'm still paying a lower tax rate compared to most poor people. It's all about working within the system we have and using the rules we have to one's advantage, rather than worrying about what law is going to get passed next.
Well I’m not going to try to convince you not to pursue your own self interest because that would be unlikely to work. But your response points to a pitfall in all such taxation schemes. The rich have far more time and resources to pursue tax loopholes and similar efforts. In my opinion, the simpler the tax code, the more easily these loopholes can be closed. The ideal system is both simple and progressive, but most simplified tax schemes I have seen are far more regressive than the current system.
Capital gains taxes don’t seem too easy to avoid currently, since they are executed through large financial institutions that keep good records. They are also fairly progressive, which is why I like them. But I am open to suggestions on how they can be more consistently applied if anyone has them.
I really like your first sentence because it brings up something I've tried to ask other commenters without much success. I wonder if you'll give me an answer. I promise it's not some "gotcha" question but one for which I'm really interested in getting your perspective.
You describe my perfectly legal tax planning as what one does to "pursue your own self interest." I'm not the least bit offended by that. My question is: how is this different from what you and just about everyone else does when it comes to paying taxes? In other words, you and I both have to follow the same rulebook and we both have to file most of the same forms. So how is it that I'm pursuing my own self interest while you are merely following the rules (or whatever you want to call it). Do you refuse to take certain deductions or credits that are available to you? Do you pay the government a little extra money beyond what the tax tables say you owe? I'm genuinely curious. What's the difference? Is it merely that I've taken the time to study the rules in greater depth? Anyway, I'm hopeful you'll choose to answer.
I totally agree with you that the simpler the tax code, the more easily the loopholes can be closed. In my opinion, you hit the nail on the head.
Let's talk regressivity vs. progressivity in a simplified tax scheme. I want to challenge the popular notion that the simpler tax system is more regressive. Yes, the income tax system is "progressive" in terms of rate structure but that's only based on nominal rates. Look at the actual effective rates that so many corporations and wealthy people pay compared to other people. In fact, some pay no tax at all. Therefore, someone who tells me that the sales tax is so regressive that it couldn't substitute for the income tax is going to have to explain how the current system isn't even more regressive. Don't get me wrong - replacing the income tax with a sales tax would suck for rich people and businesses - but it would work.
Capital gains taxes are actually pretty easy to avoid for most people and especially for wealthier people and corporations. On the corporate side, there are some pretty easy planning methods to turn the capital gains into other forms of income (such as dividends) that can be either deducted from income or not recognized. It's a bit more difficult on the individual side but there are basis step-up opportunities available.
The challenge with taxing capital gains is that the taxpayer can almost always select the timing of when to recognize them or to not recognize them at all (e.g., waiting for a basis step-up opportunity, deferral, holding in a non-taxable vehicle). Some people have brought up forced recognition by marking-to-market but I assure you that won't happen. The IRS and any taxing authority knows what an administrative nightmare it would be for them and what a burden it would be for the courts.
In a sense you are right—the vast majority of people are going to pursue their own self interest at the expense of collective society. This is a classic example of game theory—as individuals we may need to pursue strategies that leave us worse off even individually than if everyone cooperated on a different strategy. Even though I dislike this impulse, I think it’s a natural outcome of the interplay between our economic system and human nature, and so I don’t seek to chastise people for behaving this way. As I said, it is only natural, and you are probably right that I do behave similarly when filing my own taxes (though I have sometimes chosen to donate to some state programs I support). So rather than seeking to moralize people into changing their behavior, I think it will be more effective to imagine and implement a system where the individual interest better aligns with the collective good. What exactly this looks like is a larger topic, and I don’t claim to have a final answer, just some vague principles and strategies that could move us in that direction.
Regarding tax policy, it sounds like you know more than I do about the ins and outs of avoiding tax liability, so I will accept your correction on capital gains taxes. I am not ideologically tied to any particular tax—but I do maintain that extreme wealth inequality is very damaging to society, and so progressive taxation is an important strategy in not only funding beneficial programs, but also keeping this gulf from widening further or faster than it already is. If a given sales tax can be proven to be progressive enough, then I would support it, but most sales taxes I have read about fail this test. I also like sin taxes. While they aren’t inherently progressive, they do have other benefits in disincentivizing activity that is collectively harmful—taxes on drugs or pollution would be classic examples of this sort of idea. But they need to be crafted carefully so as not to worsen poverty as a side effect. Income tax is ideal in some respects because it can easily be designed to minimize the burden on the poor.
As far as people pursuing their own self interest at the expense of collective society, I believe it's a lot more complicated than that. I don't deny what you're saying, but I think there's nothing approaching consensus on what is good or bad for society and what terms like "collective good" mean. I'm not getting into semantics but rather describing something substantive and real. Let's look at a fundamental question that divides us - i.e., is the government primarily a force for good, a force for evil, or is it something else entirely?
I'm sure you will find sharp division on that issue. Therefore, I'm sure we'll have a lot of people say that it's in society's best interest to have the government collect a significant amount of revenue and a lot of other people saying that it's in society's best interest to starve the government of funds.
Therefore, although I think you're on to something important when you write about imagining and implementing a system that aligns individual interest with the collective good, I am going to modify it into something more neutral for a society that will never agree on what "collective good" means. Also, when you speak of "moralizing people into changing their behavior," I'm wondering whose morals you're describing. Is it the person who believes that abortion is immoral, or one who thinks drug use is immoral, or one who thinks that supporting Israel is immoral, or one who thinks that not paying a living wage is immoral? The way I would phrase it is that a system should be devised that collects revenue in a way that does NOT moralize.
I'm a tax attorney and although I might be ideologically interested in some forms of taxation over others, I'll give you my thoughts while being objective as I can.
As soon as you're talking about income tax, you've extended an invitation to play a game. Why? The complexity of the tax is inherent even in its definition. The first thing we need to talk about is how "income" is defined and as soon as one codifies a definition of that word, ... let the games begin.
Sales tax is different. Why? Everyone knows what a sale is and the seller can be forced by the government to remit the tax at the point of sale. That's powerful. Is it foolproof? No tax is 100% foolproof but this one prevents most games from being played as the seller has little incentive to avoid collecting and remitting the tax, and plenty of incentive to comply.
Excise taxes or "sin taxes" are tough because, again, we're going to have widespread division on what is "collectively harmful." Also, these taxes tend to punish the behavior of the poorest people in society.
The income tax is only ideal as a feel-good measure. In other words, the rates can be nominally progressive and legislators can feel they've done their job to "level the playing field." In practice, what they've done is create a system where the name of the game is to make one's actual rate (i.e., the effective rate) be much lower than the nominal rate.
Prop. 13 basically makes changing the tax system totally impossible. As a homeowner, I don't hate prop. 13, but until it is fixed, we are stuck with the tax system we have.
Fixing prop 13 will do more than anything else to fix California. And by “fix” I mean fucking eliminate it. Everyone pays market rate taxes, and if you can’t afford it the state should extend a low interest lien option so no one is forced from their home.
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We all complain about taxes. Remember the Tea Party? My old neighbor was big muckity muck in the county party. When they finally got one their boys in our district, what was the first thing he did? Complain that our road wasn't getting paved.