I’ve already condemned the foolish people of California for approving a referendum to raise the state’s top tax rate to 13.3 percent.
This impulsive and misguided exercise in class warfare surely will backfire as more and more productive people flee to other states – particularly those that don’t impose any state income tax.
We know that people cross state borders all the time, and it’s usually to travel from high-tax states to low-tax states. And we’ve already seen some evidence that the state’s new top tax rate is causing a loss of highly valued jobs.
This mobility of labor and talent is one of the reasons why California is going to get a very painful lesson about the Laffer Curve.
Politicians (with help from short-sighted voters) can raise tax rates. But they can’t force people to earn income.
Now it looks like one of the super-rich is fed up and looking to make himself less vulnerable to California’s kleptocrats.
Here are some excerpts from an ESPN story.
Phil Mickelson said he will make “drastic changes” because of federal and California state tax increases. …The 42-year-old golfer said he would talk in more detail about his plans — possibly moving away from California or even retiring from golf… Mickelson said. “I’ll probably talk about it more in depth next week. …There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now. So I’m going to have to make some changes.” …”If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” said Mickelson, who lives in Rancho Santa Fe. “So I’ve got to make some decisions on what I’m going to do.”
He’s actually overstating his marginal tax rate. I suspect it’s closer to 50 percent.
But so what? It’s still outrageous and immoral that government is confiscating one-half of the income he generates.
Heck, medieval serfs were virtually slaves, yet they only had to give at most one-third of their output to the Lord of the Manor.
I hope he’s serious and that he escapes from the Golden State’s fiscal hell-hole.
And if he does, what will it mean for California government finances?
Well, here’s what Wikipedia says about his income.
According to one estimate of 2011 earnings (comprising salary, winnings, bonuses, endorsements and appearances) Mickelson was then the second-highest paid athlete in the United States, earning an income of over $62 million, $53 million of which came from endorsements.
Now let’s bend over backwards to make sure we’re not exaggerating. Notwithstanding the Wikipedia estimate, let’s assume his annual taxable income will be only $40 million for 2013 and beyond.
With a 10.3 percent top tax rate, California would collect about $4.12 million per year. And Mickelson apparently thought that was tolerable.
But guess how much the politicians will collect if he leaves the state? I’m tempted to say zero, but they may still get some revenue because of California-based tournaments and other factors.
I can say with great confidence, however, that California won’t collect $5.32 million, which is probably what the politicians assumed when they seduced voters into approving the 13.3 percent tax rate.
After all, that assumption only works if Mickelson is willing to be a fiscal slave for Jerry Brown and the rest of the crooks in Sacramento.
As such, I’ll also state with certainty that California’s politicians won’t collect $4 million if Mickelson leaves for another state. Or $3 million. Or $2 million. Or even $1 million.
The best they can hope for is that Mickelson decides to stay in the state while also reducing his taxable income. In that scenario, the politicians might still pocket a couple of million dollars.
Not as much as they collected when the tax rate was 10.3 percent, and far less than what they erroneously assumed they would get with a 13.3 percent rate.
Regardless of Mickelson’s ultimate decision, California is going to be in trouble because most rich people – whether they’re golfers, celebrities, investors, or entrepreneurs – have considerable control over the timing, level, and composition of their income. And they can afford to move.
This is why you don’t want to be on the downward-sloping portion of the Laffer Curve. Everyone’s a loser, both politicians and taxpayers.
So we’re going to see the Laffer Curve get revenge on California and I’ll be first in line to say “serves you right, you blood-sucking parasites.”
If you want more information, here’s my video on the Laffer Curve.
And if you want to watch the full three-part series, they’re all included in this Laffer Curve lesson that I put together for the President. He seems oblivious to real-world evidence, but others may find the information useful.
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They are nickel-and-diming their targets and hoping no one notices. No single rate is over 50%, and they’re hoping few people put the whole picture together, or account for other, sneakier effects on the marginal rate. Here’s one that Mickelson doesn’t see, but most high earners with more modest success may discover: the 3.8% investment surtax can indeed bump the effective marginal rate to 62%. That’s because someone not quite as well-to-do as Mickelson (think doctors, small business owners, etc.) has to worry that an extra dollar earned above the ACA threshold not only is taxed at X% per the above calculation, it also triggers the 3.8% tax on any investment income he/she/they may have. A young worker will scarcely notice (at first). A middle-aged worker with a lot of savings for his/her/their retirement will almost certainly feel this effect. Of course, if he/she is a high-paid state/local official here in CA, he’ll have a pension to fall back on that’s actuarially worth millions, but without the inconvenience of having to actually save up those millions, nor suffer death by a 1000 cuts as taxes and inflation nibble away at them as he approaches retirement.
Doug, 55% is ridiculous. Seriously, how can anybody claim that is fair? Our government and tax system are not only unfair, they hurt economic growth for everybody. I’m sure you agree, it just kills me that liberals can be so economically ignorant and self-destructive at the same time.
The jump in CA tax comes on top of higher federal rates and a new Medicare surtax. So it’s probably not that 10.3% was just dandy, but that with everything else heaped on, it’s the only one of those tax rises he can legally and easily avoid. Bear in mind that his marginal tax rate just jumped a combined 10%, from somewhere in the mid 40s before, to somewhere in the mid/high 50s now. Start with 39.6% federal and 13.3% to the state. Add 1% for the return of the federal itemized deduction surtax. Add 2.9% for medicare (assuming he pays it as a self-employed person), then throw in the 0.9% surtax that kicked in this year, that’s 3.8% total. I’m at around 58%. Now subtract something on the order of 3% because he can deduce some of the state income tax against federal (hard to say how much because of the AMT, but we can assume he’s past the range of the AMT phase-out). So 55% is a fair estimate.
Joe: nobody really knows what point B is. One just knows, by construction, that there has to be some rate between 0% and 100% that maximizes revenue. Social-democrats would place this higher, while free market advocates expect a maximum at a relatively low rate. Yet others, the (anti)”social” (in)”justice” crowd, would even accept lowered revenues in the name of “fairness” and “redistribution”. I am afraid that the current president falls into that category. Then again, his ilk tend to be near-innumerates, so there may be stupidity rather than malice.
[…] California’s One-Man Laffer Curve « International Liberty. […]
Good stuff. Can you tell me what percentage equates to point B? And, how do you evalutate the sum of state and federal taxes via the Laffer Curve?