Two Wolves and a Sheep

Does not compute: higher tax rates on the wealthiest rarely result in greater revenues

This front-page headline from Friday’s San Francisco Chronicle brings to mind the old adage about democracy being two wolves and a sheep voting on what to have for dinner: “Voters Willing to Tax Wealthy.”

The article goes on to detail the not-surprising results of a poll in which voters were asked to choose between supporting the governor’s plan to pass a 1% surtax on incomes over $1 million, or suffer the consequences of automatic defunding of education.

(Funny how it’s always schools, police, and fire houses that face the ax, and never jobs, salaries, or pensions of the hundreds of thousands of bureaucrats the state employs.)

If passed, California’s top earners will face the highest income tax in the country. At the same time, the state sales tax rate—already the highest in the nation—will also be increased.

California voters might be surprised to learn that tax-the-rich schemes have a bad habit of missing their projections. Most recently, Britain’s hopes for more money from its wealthiest citizens failed to materialize:

Preliminary figures out this week show that Britain’s 50% top marginal income-tax rate may have reduced tax revenue from top earners by as much as 5%, compared to the old 40% top rate.

The biggest problem with projecting windfalls from such taxes is that free-spending budgets get passed based on the projections, which result in increasing deficits when the windfalls fail to materialize.

A far better approach would be for California’s Governor Brown to follow the example of his Wisconsin counterpart. After Governor Scott Walker last year successfully shifted the cost of some of their pension and insurance benefits to state employees from taxpayers, the state has saved millions of dollars, and “Mr. Walker was able to balance the state budget without new taxes or looming deficits.”

Some of the most significant results have come in local school districts, where school boards and governments have been able to use the public-union reforms to reduce budget shortfalls. In districts like Wauwatosa, Racine, LaCrosse and Eau Claire, the changes in health and pension contributions prevented layoffs that were expected to be widespread and in some cases allowed the boards not to fire a single teacher.

Furthermore, freed of the old contracts, several districts have been able to open their healthcare coverage to other insurers, saving them millions of dollars:

Based on statewide media reports, [Wisconsin-based MacIver Institute] estimates that as of September 74 local units of government were saving some $162 million.

Unfortunately, it’s extremely unlikely that Gov. Brown will follow such an example, for a couple of reasons: California is today facing these huge pension and benefit costs because Governor Brown under his previous administration—the good old days, when happy days could never end—granted these generous packages; and secondly because Wisconsin unions, angered at their loss of power under Gov. Walker’s reforms have instituted a recall campaign—not a fate many governors are eager to face.