California (Bad) Dreamin’: The Wealth

California (Bad) Dreamin’: The Wealth

Ken Hakuta is an interesting guy.  Since 1983 he is best known as Dr. Fad.  Ken is a Japanese-American inventor and television personality. Hakuta, as Dr. Fad, was the host of the popular kids’ invention TV show “The Dr. Fad Show”, which ran from 1988 to 1994. The show featured children’s inventions and promoted creativity and inventiveness in children. 

Ken is also best remembered for a quote he made a few years back, “California is the great incubator of fads. Fads get hot in California. A good idea can come from Des Moines, but it’s not going to be anything there. Then it’ll hit Venice Beach or Westwood and go all around the country, back to Des Moines.” 

Hmmm . . . I’ll give California credit, a couple of great American staples started there and moved eastward and eventually spread worldwide. The Golden State gave us blue jeans, popsicles, the Beach Boys, and skateboards.  On the other hand, we can also “thank” our west coast friends for leisure suits and pet rocks.  

Another fad maybe purcolating in California, and this one may fall into the category of those we may really regret.   California is one of the first states that has politicians proposing legislation that would enact a state-wide wealth tax. One of the supposed benefits of a wealth tax is that it could address the growing wealth gap in the United States. In fact, the nonpartisan CBO (Congressional Budget Office) did a study that showed the top 10% of Americans saw their wealth grow by 54% from 1989 to 2013. During the same time frame, Americans in the middle 50% only saw their wealth increase by 4% and those in the bottom quarter actually saw their wealth drop by 6%.  Many of the Democrats who sought the 2020 party nomination, including Senators Elizabeth Warren and Bernie Sanders, included some variation of national wealth tax as part of their economic platforms. However, the problem may be that a wealth tax is not the right solution to address the lagging middle class.

Republicans, while acknowledging the middle-class needs a leg up and greater participation in the benefits of national economic growth, are opposed to any wealth taxes. They also argue that societies from the beginning of time have had people along a spectrum of wealth. Even in communist countries like the former Soviet Union, there were the haves and have-nots. And poverty-ridden countries like Haiti, too, have wealthy families. They probably rightfully see our system of American capitalism and private property exceeding those situations by significant measure. Even though we need to do a better job helping folks in the middle, there is no clear proof that increasing taxes or money manipulation has done much to achieve that goal throughout US history.  

Folks, I am not here to pick sides politically.  My role is meant to educate and to present the pros and cons of the ideas floating around and how they may impact Cutter Family Finance readers.  I do worry about fads and how they can gain momentum but might not really be the solution they are claiming to be.  You see, the difficult dilemma that politicians must resolve is the issue of how we tax at a rate that allows our free market system to grow economically. If we tax at too high of a rate, while the well-off don’t do as well, the economy falters. More importantly, the middle class and the less fortunate suffer greatly when the economy goes into recession. We only have to look at what the middle class is experiencing during the current pandemic fueled recession.  

In addition, so-called “wealth taxes” don’t have a great track record when you look at other countries that have imposed them in the recent past. In the year 1990, 14 countries in Europe had some sort of wealth tax on the books. Not surprising considering some of their more progressive and socialist-leaning European governments.  For the most part, they have been failures and didn’t even come close to achieving any sort of successful wealth re-distribution. France was one of those countries, but from 2000 to 2014, nearly 42,000 high wealth individuals left France.  The results were so dismal that French President Emmanuel Macron eliminated the law in 2018.  As of 2019 only three European countries still had a wealth tax in effect.  

Sometimes, some type of additional taxation may give the appearance of the easy or only solution to helping those at the lower rungs of the economic ladder.  But in fact, the solution is probably going to need to be more nuanced.  The European experience with the wealth tax shows that trying to simply move wealth from one group to another doesn’t address the fact that we need to maintain sufficient incentive for everyone to build wealth. It’s important to consider everyone, but entrepreneurs and innovators need to stay inspired.

Folks, I don’t know what the answer is. But I do know this – it’s not going to be as simple as the wealth taxes’ that have been tried by others or like the one that is being proposed in California. Some people have suggested an elimination of all income tax in favor of a national sales or consumption tax. Years ago, Steve Forbes ran on a platform of a flat tax. Those ideas would require a great political shift.  And remember, the permanent national US income tax didn’t start until 1913, long after the founding fathers signed the Declaration of Independence.  

Like most Americans, I’ve got a drawer full of blue jeans, but as Jill will tell you, there’s no room for a leisure suit hanging in my closet. So to our friends in California – thanks but no thanks.  

So as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at jeff@cutterfinancialgroup.com.

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