As we already covered in previous articles, we see financial repression and wealth transfer policies as potential tools that could be employed by governments to achieve just that. In that context, two recently proposed bills in California caught our eye, and despite the push-back they may face, they show the extent the indebted hands of governments could go to.

“There is a great deal of ruin in a nation”. ~ Adam Smith

As we enter fall and the fears over new lockdowns and shutdowns are intensifying, so are the serious doubts about whether the global economy could survive these scenarios. The full scale of the damage that was already done by the global economic freeze is only now becoming clear and these are particularly treacherous times for investors world-wide.

We have undoubtedly witnessed a tectonic shift, in economic, monetary, fiscal and political terms. Despite the fact of being already saddled with record amounts of debt, governments all over the world have now embraced “whatever it takes” as their guiding principle with massive, unprecedented spending and further borrowing. It doesn’t take an economist to see that “something’s got to give”: all these programs will have to be paid for somehow and all that debt will have to be serviced.

,Higher, retroactive tax hikes, and the first Wealth Tax

California has long been infamous for its deep financial problems. Despite its gigantic welfare system, it hosts over 47% of the entire nation’s homeless population, and as recent as in March of this year, it also became the first state to borrow money from the federal government to make its unemployment payments. In this context, a tax hike wouldn’t be that surprising, especially given the added economic damage of the Covid-19 crisis. However, what is different this time is that the new, proposed laws have crossed several important lines for the first time in the nation’s history.

Let’s start with Assembly Bill 1253, which was introduced in July and proposes to raise the current 13.3% top tax rate for the highest earners to 16.8%. This would translate into a massive 53.8% income tax for top earners, as one factors in the federal income tax. The proposal would also apply this tax retroactively back to January 2020.

If this bill wasn’t enough of a wake-up call to high earners and savers, California lawmakers also proposed another, much more consequential bill this summer too. Assembly Bill 2088, better known as the first wealth tax in American history, would impose a levy of 0.4% on California residents’ worldwide net worth in excess of $30 million. As the bill specifies, this would take into account “all assets and liabilities held by an individual, globally, capturing the immense levels of accumulated wealth held by the top 0.1% of Californians”, meaning that it would target wealth and assets that are held outside of the state too.

Given the egregiousness of these bills, it is natural to think this would simply become yet another good reason for high earners and job providers to flee the state, a well-known trend that has been established for years. The lawmakers, however, already planned for this: the bill also includes a provision that will allow the state to continue taxing ex-Californians for 10 years after they leave. They would still have to pay 90% of the tax the first year, 80% the second year, and so on.

Critics of these bills are right to note the perverse incentives these new California taxes would create. When one considers that nearby states such as Nevada have no income tax at all and with the new work mobility created by the Covid-19 crisis, the problem with higher income taxes becomes apparent.

As for wealth tax, the wealthy are, in many cases, the most mobile members of society, and the less appealing you make your state for them financially, the more likely they are to take their success elsewhere. And of course, there are obvious legal roadblocks to this scheme, as the idea of taxing residents of another state is unlikely to survive in a court.

California relies heavily on its wealthiest residents for tax revenue, with income tax being by far the biggest revenue source. The top 1 percent of Californians pay nearly half the state’s total income taxes and so a continued mass exodus of income and wealth would only backfire and lead to a larger hole in the already precarious fiscal condition of California.

Nevertheless, the very move by lawmakers to make these proposals and their apparent desperation to fill the state’s financing gaps, are clearly indicative of the wider, very dangerous trend towards financial repression and, more specifically, higher and much more aggressive taxation.

,Implications for Investors

As we’ve already highlighted, financial repression is not a trend to be taken lightly. The Covid-19 crisis might not have given birth to it, but it certainly supercharged it and we’re already seeing serious legislative attempts in this direction. As we move deeper into recession territory, we expect these attempts to multiply and to spread in most major economies, as governments grow ever more desperate to find ways to pay for their popular spending sprees and redistributive schemes, but also to service their enormous debt. As a result, we anticipate more, higher, and much more aggressive taxes going forward.

At this point, we feel it is imperative for investors, HNW individuals and families not only to keep a very close eye on relevant developments, but also to proactively plan ahead.

As we have mentioned in prior notes before, this requires thinking structurally, strategically, and managing your liquidity and risk exposures intelligently, all while keeping a focus on safety, asset protection and longevity. In cooperation with our international network of planners and attorneys, we do precisely this and invite you to contact us for guidance and support.

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