Years ago, Gen. Colin Powell taught me a quick and effective lesson about economics and investments.
I was in Washington, D.C. for a meeting between the secretary of state and about 20 editorial writers from across the country. It was only a few weeks after 9/11. The State Department was on high alert, not only because of the terrorist attacks but because anthrax had been discovered in pieces of mail, including in the building where we met.
But Powell wanted to talk about an economic principle he laid out in four words: “Money is a coward.”
He used it in the context of how struggling nations can succeed. Powell said he repeated the same basic advice to each foreign minister from an oppressive regime who paraded through his office. “Come on, come on, try democracy. Free your people. Give them a chance.”
If he were alive today, Powell might be giving that advice to elected officials who run some of America’s cities and states.
Budget deficits
A couple of months ago, Newsweek reported that 14 states are staring at budget deficits, trying to figure out what to do. Some are proposing budget cuts or hiring freezes. Some are tinkering with tax rates. Others are thinking about dipping into rainy-day funds.
And some are thinking about imposing wealth taxes that apply to their richest citizens.
In California, voters this year may consider imposing a one-time 5% tax on the wealth of the richest people. That is, a tax on what the person is worth, not what he or she earns.
In a twist, New York City Mayor Zohran Mamdani and Gov. Kathy Hochul support a yearly tax on condos and co-ops worth above $5 million if their owners also own a separate primary residence somewhere outside the city.
These tend to be popular proposals. People like sticking it to the rich. Even some wealthy people support being taxed more. Mitt Romney has said the rich should pay more, but he focused mainly on closing loopholes and entitlement reforms, not taxing net worth. Such measures have dismal performance records.
Why? Because money, being cowardly, flees those who want to punish it and seeks the path of least resistance.
Rich people move
Earlier this month, Kiplinger.com reported on new IRS data that shows how billions of dollars are moving from high-tax states to low-tax states. The report said wealthy households can realize “five-figure annual savings” from such a move.
In the 2022 tax year, the IRS figures show California lost $11.9 billion in adjusted gross income, followed by New York with a $9.9 billion loss. Some research shows affordability is another driving factor, causing even lower-income households to move. Either way, the effect is a strain on the budgets of the states that are losing people.
The Tax Foundation, an independent research group, noted recently that a lot of nations worldwide have repealed their wealth taxes. Why? “They raise little revenue, create high administrative costs, and induce an outflow of wealthy individuals and their money,” the foundation said.
“Many policymakers have also recognized that high taxes on capital and wealth damage economic growth.”
Unintended consequences
The foundation also states what ought to be obvious: “Wealth taxes disincentivize entrepreneurship, leading to less innovation and less long-term growth. A wealth tax reduces wages, destroys jobs, and reduces the stock of capital. All income groups are worse off under a wealth tax due to decreased economic activity.”
Reacting to a proposed wealth tax in Minnesota, tax-litigation specialist and author Daniel J. Pilla said it would redefine government’s relationship with its people.
“It is a direct tax on the ownership of property itself, based solely on the fact that a person has saved, invested, and accumulated capital over time, and only after all other taxes have been paid,” Pilla wrote for National Review.
“In other words, Minnesota is proposing to tax success, not when it is realized through income, but simply because it exists. That is a dangerous idea in a free society.”
Admittedly, these arguments are complicated by a federal budget system that is careening out of control, already harboring a debt approaching $40 trillion. That is a problem that eventually may defy the nation’s ability to tax or cut its way to safety, no matter how it tries to accomplish this.
In any event, a wealth tax alone would not provide any answers. As the late general once taught me, money is too cowardly for that. Even the U.S. could learn from his urgings to “Free your people. Give them a chance.”