How not to tax the rich

A recent article in the OC Register discussed a $150 million house for sale in southern Orange County:

A rare 42-acre San Juan Capistrano estate known for decades as “Porcupine Hill” has hit the market for the first time for $150 million. . . .

Marketed as “Casa Grande,” the estate includes an existing 21,000-square-foot structure comprised of three apartments, offices and storage space completed in 2010 and permitted plans for a 38,000-square-foot main residence on a ridgeline with 360-degree views.

The plans, more than 40 years in the making, also include two 10,000-square-foot guest houses and unlimited maintenance quarters for the existing agribusiness.

While the future residences fall under Proposition 13, the agribusiness is taxed under the Williamson Act, offering reduced property tax savings based on production.

It is not at all obvious that farms should pay a lower tax rate than other businesses.  Nor does it seem likely that this sort of “gentleman farmer” is what the legislature had in mind when they carved out those tax breaks for agriculture.  Many young people are moving away from Orange County due to the high price of housing, and yet the state offers tax breaks to preserve a 42-acre “farm” in an area that is in desperate need of more housing. 

In the past, I’ve discussed the fact that New York City often taxes the Manhattan condos owned by billionaires at much lower rates than the houses owned by blue collar workers in Queens.  I’ve also discussed the fact that progressive politicians worked hard to repeal the federal luxury tax on large private yachts.  Many of these politicians also favor the SALT tax deduction, which overwhelmingly goes to higher income people.

Both New York and California are theoretically “progressive” states, full of politicians that claim to favor a more egalitarian society.  Perhaps they would argue that their representatives in Washington favor higher taxes on “corporations”, as if non-human entities could actually pay taxes.  What can we infer about a politician’s values when they oppose high taxes on the consumption of the rich, but favor high taxes on investments made by the rich? 

Some on the left would argue that the best way to tax the rich is through taxes on income and wealth.  But those taxes can be evaded through clever tax avoidance schemes:

Say you own a successful business—so successful that your stake in it is worth $1bn. How should you fund your spending? If you pay yourself a wage of $20m a year, the federal government will collect 37%, or some $7.4m. So perhaps you should take a salary of $1 and sell $20m-worth of shares. If these were gifted to you upon founding the firm, the entire sum represents capital gains and will be taxed at 20%, which would mean a $4m hit. What if, instead, you called up your wealth manager and agreed to put up $100m-worth of equity as collateral for a $20m loan. In 2021 the interest rate on the loan might have been just 2% a year, meaning that returns from holding the equity, rather than selling it, would easily have covered the cost of servicing the borrowing. Because the proceeds of loans, which must be eventually repaid, are not considered income, doing so would have incurred no tax liability at all. . . . When the holder of an asset dies, the value for capital-gains assessments is “stepped up” from its purchase cost to its value at the time of death. In this way, “buy, borrow, die” does not simply defer capital-gains taxes—it can eliminate them entirely.