Media coverage of San Francisco’s recent passage of a citywide “wealth tax” has been hard to come by, to say the least. One can be forgiven for wondering if leftist media outlets even see the writing on the city’s wall. It is not just that this bill will do little to provide additional net revenue to a city facing financial ruin; it is that this bill will surely do the exact opposite. Even critics of modern income inequality see policy prescriptions such as this as counterproductive. Indeed, in the present COVID-19 moment, San Francisco needs all the help it can get to attract businesses and well-paid taxpayers. This couldn’t come at a worse time.
So, what is this new tax? Supporters call it the “overpaid executive tax.” (Kudos to them for framing so bluntly.) Technically, the citywide tax will operate as a levy of at least 0.1 percent on companies that pay their CEO more than 100 times the median pay of their workforce. That 0.1 percent tax can reach as high as 0.6 percent depending on how far above the company’s median pay the CEO’s total compensation is. Embedded in the name attached to this new legislation is the belief that disinterested third parties should determine fair and appropriate pay. Whether that be city bureaucrats or voters unconnected to the company in question, the notion that such actors should serve as the arbiters of proper pay levels is nothing more than a form of price-and-wage control. An easy retort to my concern here may be, “Why care about a mere 0.1 percent hit?”
Well, if what we are seeking to address is really egregious, unfair, socially contemptible income inequality — robber-baron stuff — why should we stop at 0.1 percent? In other words, if the rationale for this 0.1 percent is what its proponents say it is, why are we only talking about 0.1 percent? If a Silicon Valley tech billionaire makes an amount considered to be unfair relative to the money paid to, in all probability, administrative support staff, shouldn’t voters and bureaucrats up the ante here, seeking far more than a 0.1 percent surtax?
The fatal flaw of this bill and others like it lies in the idea that fair compensation should be defined by people other than those who have skin in the game — namely, a company’s principals, board of directors, and ultimately the shareholders to whom it reports. Once one concedes the principle that legislative intervention is required to force those within a company to change the way it pays people, the door is opened to an arbitrary exercise of power. Make no mistake: There is no magic behind the 0.1 percent figure. Setting the tax at that level was arbitrary, and arbitrary judgments are easy to change. Sure, it remains there today, but perhaps 1 percent or 5 percent will be the “right” number next year. And perhaps even higher the year after that. The lack of limiting principle here is frightening, and the slippery slope is easy enough to see.
Making it all the more dangerous is that San Francisco is already on the slide. The wealthy are leaving the city in record numbers and at a record pace. And unlike many of the wealthy in New York City still waiting out the pandemic from their beach houses, the San Francisco defectors are not coming back. The very nature of the largest businesses in San Francisco makes them tech-forward, not just able to take advantage of different work environments, but rewarded for doing so. Throw in the recent increase in the transfer tax on expensive real estate in the city, and the slew of recent business tax increases embedded in Proposition F, and there is almost no confusing the message the city is sending to wealthy businesses and their proprietors: Your kind is not wanted here.
This brings us back to the key practical problem faced by those who want to soak the rich in a city or a state. In a country that allows mobility, there is no reason for a wealthy employer to stay in inhospitable business environments. San Francisco’s new wealth tax seeks to address that by saying businesses must pay the 0.1 percent tax if they have any office presence in the city, even if they are not headquartered in San Francisco. Why quit while you’re behind? Force company headquarters out, and their satellite offices too.
Every day brings a new headline of high-profile companies and executives leaving the Golden State. The 13.3 percent top state tax rate is punitive enough. The regulatory environment is infamous. And while tech company CEOs may not mind the stratospheric price of real estate, their employees certainly do. What a COVID-damaged city such as San Francisco needs is to plead with Sacramento to decrease taxes and regulations, so that its city can retain major revenue contributors. Instead, it has chosen to add insult to injury by adding to incentives to leave the state, and even more inexplicably, by encouraging those who stay in the state to do so just outside the city. That’s right — San Francisco may not just push successful tech companies to Denver and Austin — they may even push them to Palo Alto!
And while we’re discussing this sort of approach to taxation, it’s worth adding that a true wealth tax on the balance sheets of ultra-high net-worth people does not work. As I wrote back when Elizabeth Warren raised the issue during her presidential campaign, the rationale is misguided, the legal propriety is dubious, the amount of money it raises is over-stated, and the misallocations of capital that it creates are significant. San Francisco’s modified version of a wealth tax is equally misguided. It will lead to diminished revenue as more businesses leave the city, and even more on top of that as new businesses seek a more friendly neighborhood in which to start. Income inequality is not solved by making poor people poorer, or by making them unemployed.
San Francisco would be wiser to pursue what it is chartered to do as a city — addressing high crime and homelessness — rather than what it is inherently incapable of doing — serving as the arbiter of what wages should be. So far, it is not doing either very well.