The Capital Note

The Capital Note: The Taxman Cometh

A tax preparation office in Los Angeles, Calif., April 26, 2017 (Mike Blake/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: California Taxes, Corporatism in Japan, and a bit on Adam Smith.

The Taxman Cometh

One sign that a jurisdiction’s taxes are too high is when leaving that jurisdiction is not enough to escape the taxman’s grasp. One example: The United States, which (disgracefully) has long taxed its citizens on their worldwide income wherever they may live (a principle also adopted, I believe, by the USSR) and also effectively imposes an “exit tax” on those who renounce their citizenship. But there are signs that what happens at the Federal level may ultimately be adopted by the states, too. It is already notoriously difficult to leave (for tax purposes) some of America’s greedier states, but California may be taking this to the next level.

The Wall Street Journal:

Democrats in Sacramento are proposing to raise the state’s already punitive 13.3% top income tax rate to 16.8%—retroactive to January of this year. Now’s a good time for California high-earners to take their money and run.

The Assembly bill would raise the top rate to 14.3% for households making more than $1 million, 16.3% on income above $2 million and 16.8% above $5 million. The combined federal-California top marginal tax rate would rise to 53.8% on wage income and 40.6% on capital gains. Another Assembly bill would apply a 0.4% wealth tax on assets over $30 million.

Ah yes, a wealth tax.  Hold that thought.

Back to the WSJ:

Democrats say the income-tax hike would only hit the top 0.5% of taxpayers and the wealth tax would nab the top 0.1%. But the top 0.5% currently pay 40% of the state’s income-tax revenue—$32 billion in 2018—and are mobile. California has experienced an accelerating exodus of high earners since the state in 2012 raised taxes on individuals making more than $250,000. In 2018 the state lost $8 billion in adjusted gross income to other states, up from $135 million in 2012, according to IRS data.

Mobility is not the tax collector’s friend, and so it is proposed that California’s wealth tax should be accompanied by an anchor.

The California assemblyman proposing the wealth tax has also proposed applying a “phased” approach to make sure Sacramento recoups its share of the income of California residents who leave the state. “If you move in Year One, 90 percent of the tax bill applies,” he told Fox Business.  The following year it drops to 80 percent and so on until it is phased out to zero.

On the other hand, anyone with $30 million still crazed enough to move to the state (I wonder if Prince Harry has really thought this through) will get a welcome mat of sorts: He or she only has to pay 10 percent of the tax in year one, 20 percent in year two and so on.

— A.S.

RIP Japan, Inc.?

The so-called Japanese miracle — the astronomical economic growth of Japan after World War II — was in large part the result of a partnership between the country’s bureaucrats and its business leaders. In the ’60s and ’70s, the Ministry of International Trade and Industry (MITI) funneled capital to highly productive manufacturing and machinery firms. Exports skyrocketed, ungirded by the keiretsu banking system, which extended loans under the direction of the government. The corporate sector came to comprise a sprawling nexus in which all companies seemed to own stock in each other.

But the state-driven economy sowed large imbalances that came to a head when Japan’s financial markets collapsed in the 1990s. Bloated state-owned enterprises tapped “evergreen” lending from the state-driven banking system, crowding out more-productive firms. Now, the sources of Japan’s postwar strength look like glaring weaknesses. The keiretsu that flushed productive firms with capital during periods of high productivity proved unable to mobilize capital when those firms faced stresses. And the policies of lifetime employment and enterprise unionization that fostered corporate harmony during the boom became a major barrier to productivity, as firms could not fire their labor forces.

Prime minister Shinzo Abe has attempted to escape Japan’s lost decades through his program of “Abenomics,” which consists of three “arrows”: monetary easing, fiscal stimulus, and structural reform. The latter and most pressing arrow of Abenomics has seen mixed success. But on the key issue of corporate governance, Japan appears to be making progress. Abe has increased disclosure requirements for cross-shareholdings, and firms that take stakes in other firms now have to provide an economic rationale for doing so. Regulators have also increased capital requirements for Japanese banks, pushing them to unwind bad assets.

The upshot: Cross-ownership of shares in the Tokyo TOPIX index has fallen below 10 percent, its lowest level ever. In the 1990s that figure reached a high of 34 percent, according to the Nomura Institute of Capital Markets Research.

As Makiko Hakazoki writes in the Financial Times:

These dense webs of equity ownership have often been a source of frustration among investors — and not just because they introduce needless volatility into companies’ financial statements. The tendency for cross-holders to vote steadfastly with management means the practice has been linked to propping up underperforming executive teams.

While the day’s of double-digit GDP growth are far in the past, Tokyo seems to be making some headway in revitalizing the economy.

— D.T.

Around the Web

Speaking of California…

Electricity blackouts are awful at any time, but especially during an extreme heat wave and for reasons that are man-made. That’s what millions in California have been enduring in recent days, and their plight is a warning to the rest of America about the risks of Green New Deal policies.

The California Independent System Operator (Caiso), which manages the state’s power grid, declared a high-level emergency Friday and Saturday evenings and ordered utilities to reduce power usage. California and most of the southwestern U.S. are experiencing a severe heat wave. But other states are managing to keep power flowing. Why can’t California?

A clipper shortage.

Millions of American haircuts start among the tassel-topped cornfields of Sterling, Ill., two hours west of Chicago. That’s where some 1,200 workers machine, assemble, and ship Wahl Clipper Corp.’s clippers and trimmers, which are to barber and beauty shops what Mac laptops are to graphic designers. Wahl, the default brand of buzzer, has market share up to 80 percent, depending on the particular device.

Decades from now, MBA students may well be studying what happened at this company and in this little town of 15,000 people when Covid-19 swept across the heartland. There may be no better example of how violently a pandemic can mangle a microeconomy—or how businesses can survive and even thrive under such extraordinary conditions.

Willie Sutton would understand…

Borrowing costs are so cheap right now that not even Apple Inc. could resist, becoming the latest to join a boom in issuance from the world’s biggest technology companies.

Apple, which hadn’t borrowed in dollars more than once in a calendar year since 2017, tapped the investment-grade market for $5.5 billion in its second trip since May. It was cheap to issue debt then and is even better now, with cash-rich companies like Amazon.com Inc. and Google parent Alphabet Inc. getting in on the action, outdoing each other to set a new floor for yields.

Random Walk

From Adam Gopnik’s (2010) The New Yorker review of Nicholas Phillipson’s biography, Adam Smith: An Enlightened Life:

It was this connection—between the work of being a social being and the work that social beings do—that began to rule Smith’s meditations on the market. For Smith, the market is imaginative sympathy on speed. “Man continually standing in need of the assistance of others, must fall upon some means to procure their help,” a student’s lecture notes record Smith as saying. “This he does not merely by coaxing and courting; he does not expect it unless he can turn it to your advantage or make it appear to be so. Mere love is not sufficient for it, till he applies in some way to your self love. A bargain does this in the easiest manner.

That last sentence is the really explosive one. A bargain does this in the easiest manner. Where can you find a sympathetic community, people working in uncanny harmony, each aware of the desires of the other and responding to them with grace and reciprocal charm? Forget the shepherds in Arcadia. Ignore the poets in Parnassus. Visit a mall. For Smith the plain-seeing Scot, the market may not be the most elegant instance of human sympathy, but it’s the most insistent: everybody has skin in the game.

— A.S. 

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