California’s Tax on History
by Fred E. Foldvary, Senior Editor, 25 February 2013Most taxes are imposed on the future or in the present time, but California is now also taxing the past. The state has eliminated a tax reduction on capital gains not only for future income but retroactively on the income of the past. Decisions and actions made up to four years ago will now be subject to a higher tax than the tax rates that applied in the past. Shareholders will be billed on the half the capital gains that were excluded, with a tax rate that now goes up to 13 percent of income, on top of the federal taxes.
The authors of the Constitution of the United States of America were opposed to imposing laws on the past. A law that applies a new restriction or cost on past actions is called “ex post facto.” The term is Latin for “after the fact.” Article 1, Section 9, Clause 3 of the Constitution states, “No bill of attainder or ex post facto Law shall be passed” by Congress. Section 10 restricts the powers of the states:
“No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.”
The ex post facto restrictions of the Constitution apply to criminal cases, but not to civil cases, as the Supreme Court ruled in Calder v. Bull, 3 U.S. 386, 390-91 (1798), even though the Constitution does not have that distinction. The enforcement of income taxes is not considered a criminal matter unless there is fraud. Some taxes have been reduced retroactively, but since tax reduction is a benefit, there is no constitutional problem. The problem arises when taxes are increased retroactively.
Retroactive taxes may be legal, but they are morally wrong, and they cause economic damage. Even a tax that is morally good, such as a pollution charge, is morally evil when applied to past actions. That would even apply to slavery. Suppose a master owns a slave when slavery is legal. The moral wrong is committed not just by the slave owner but also by the voters. It would be morally bad to tax the master for the past slavery, because the voters authorized it.
Thus also a land value tax should not be applied to past ownership. The landowner in effect received a subsidy in the form of higher rent and land value due to the public goods provided by the state. But it would be wrong to take back that subsidy. So too, farmers who get a subsidy for growing crops based past decisions based on that subsidy; taking away that subsidy later would harm them because they made decisions about the future based on their current income. Any compensation for damage done in the past, under laws then in effect, should be borne by the people, as they were responsible for the damage in a democratic government.
Retroactive taxation also does economic harm by destroying the rule of law. If taxes can be imposed on past actions, then current taxes become uncertain, as they can be changed in the future. It becomes impossible to make economic decisions based on expected costs and benefits, because one does not know how what the tax rate is today, if it can be changed ex post in the future. Ex post ergo de futuro.
An entrepreneur considering starting a new business will consider not only the high taxes on production in California, but also the higher tax rates of the future, and also the ex post facto taxes that could be applied on his present-day investments. He would more likely establish his business in an enterprise-friendly state that better applies the rule of law.
The California ex post tax is a “bait and switch” operation. They baited new enterprises with a lower capital gains tax, and then switched to remove the tax break retroactively. Why is State of California deliberately driving away enterprise?
California’s natural climate and resources generate more than enough land rent to pay for all of the state’s public goods, but the people of California have rejected the concept of benefitting equally from the benefits of nature and community. The have chosen instead to tax-punish labor, enterprise, and consumption, so the blame for retroactive taxation is ultimately on the voters. A resident of California has no legitimate complaint about unemployment, pollution, congestion, and the lack of economic opportunity if that person does not support a prosperity tax shift.
-- Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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