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No, this is not the way to cut income inequality
California, the “Golden State,” with 38 million residents, many from all corners of the earth, the eighth largest economy in the world, is finally on a path to recovery. Under Governor Brown’s astute stewardship, we are now facing a budget surplus after many years of massive deficits. The unemployment rate that peaked at over 12.4% in 2010 is now 7.8% with a rising GDP.
However, California is still ranked 48th in the Tax Foundation’s “State Business Tax Climate Index” in 2013 prompting companies like Toyota to flee the state by moving more than 2,000 jobs from Torrance, CA to Dallas, TX. To his credit, Governor Brown is trying to remedy this with a sales and use tax exemption for purchase of equipment in manufacturing, R&D and Bio-tech, tax credits for companies that hire in targeted areas, and a $780 million fund offering tax incentives to dissuade companies from relocating.
However, many of Brown’s fellow Democrats in the Legislature are working to pull the rug from economic recovery by championing laws that are hostile to general business interests.
As Dan Walters eloquently pointed out in a recent Mercury News op-ed on the left wing Democratic legislators—“If you are a politically incorrect business, your taxes should be raised, but if you are trendy, like space travel, or your executives contribute heavily to Democratic campaigns, like the film industry, you get tax breaks.” Walters cited the tax breaks provided to the film industry and the Assembly Bill 777 which would provide a targeted property exemption to SpaceX owned by Elon Musk who already enjoys generous subsidies for his other venture, Tesla, a darling of the left. Ironically, per press reports, Tesla is considering locating its planned battery factory in Texas.
Another example of the California Legislature’s misguided venture is SB 1372, a bill under which companies whose CEOs make more than 100 times the pay of their average employee will be taxed at a higher rate—almost double. While the objective of reducing income inequality is laudable, should it be the Government’s job to determine what a private enterprise should reward its CEO for achieving shareholder objectives? And, there is no requirement in the bill that savings from the CEO pay will reach the rank and file workers.
Every business enterprise in the United States has 50 possiblities for locating operations, or worse, moving overseas. Each state must compete to earn the trust of these businesses, and enable their development such that it will result in job growth and an influx of new residents—thus providing both increased tax revenue and economic growth. California must strive to be the destination of choice for businesses and that is the primary responsibility of our legislature. California’s business climate should be as good as the weather we enjoy!
Rameysh Ramdas, an S.F. Bay Area professional, writes as a hobby.
Yes, California should have a sliding levy
Remember Gil Amelio? He was CEO of Apple in Feb 1996 and was fired in July 1997 by the board. During that period Apple stock hit a 12 year low. For this dubious distinction Amelio received a performance bonus of 2.6 million and a severance pay of 3.5 million. One would have to agree that was egregious over-compensation. Apple’s board of 1997 was a beacon for accountability.
Recent boardrooms by comparison have been awarding billions to people without any accountability. A study conducted by Economic Policy Institute in 2011 found that the discrepancy between top and average worker increased from 20 to over 200 since 1965 while the stock market increased by an inflation adjusted factor of 2.5. Such inequality is not just about fairness or sustainability of the middle class. It shakes the very core of free market capitalism.
Whose job is it to fix this? Half-a-century of experience shows that markets are not able to or being allowed to address it. Just as different states are experimenting with minimum wage laws large states such as ours should pioneer the inequality tax.
While it is hard to estimate fair compensation ratios, 100 times average employee salary seems to be a very rewarding number. The fact that California “has the third worst state business tax climate in the nation,” according to CalTax, is empirical testament to the ineffectiveness of tax policy to stimulate corporate activity.
“Corporations looking to relocate, or even establish, a business in the West may shy away from California, as the state’s 8.84 percent flat rate is the highest corporate tax rate in the West,” the Tax Foundation said in 2011, and this scenario hasn’t changed. Nationally, only nine other states have a corporate tax rate higher than California in 2014.
It is also educational to look at the companies that create jobs in California. Just as in the country, companies with less than 500 people account for a majority of the jobs in the state. These businesses typically do not have highly paid executives on their payroll and will have compensation ratios that are well under the threshold for SB 1372. In fact such efficient companies will benefit under the law with a much lower tax rate paid for by the inequality tax.
This could create a favorable environment for small and innovative businesses.
California lawmakers should be concerned with wage gaps and there is no doubt that the economy will grow if businesses are incentivized to plow back their profits into paying higher salaries to the rank and file than increasing compensations for their executive staff.
California is a large state with a large economy. As such, simplistic tax policies will not be sufficient to keep the state’s economy growing. It has to be a combination of quality of life, policy fairness, taxes and services that will attract innovative and creative minds to the state that form the talent pool to create the Apples and Teslas of the future.
Mani Subramani works in the semi-conductor industry in Silicon Valley.