Is California about to take center stage nationally once again? Proposition 40, the so-called “Billionaire’s Tax”, is on the ballot. It is a wealth tax and would levy the super rich at a rate of 5% on assets on a one time basis. It would raise approximately $100 billion and help pay for medical expenses for the disadvantaged as well as subsidizing rural hospitals.
In 1978 the voters of California passed Proposition 13 which drastically reduced property taxes presaging the Reagan Revolution of 1980.
The much-maligned state of California has an interesting history in post-World War Two national politics. California still attracts more venture capital than the other 49 states combined. Silicon Valley remains the locus of technological innovation in the United States and the world.
How California attained its preeminent position in technology is not exactly a textbook example of laissez-faire economic theory in action.
In 1958 Edmund G. “Pat” Brown, a Democrat, was elected governor of California. This coincides almost exactly with the formation of companies such as Fairchild Semiconductor in what is now Silicon Valley. Brown embarked on a huge infrastructure improvement program in California which included highways, water projects and the University of California educational system. The UC system has produced some of the most prominent innovators in the tech world such as Gordon Moore, co-founder of Intel, and Steve Wozniak, co-founder of Apple.
In its early days the University of California system provided students with a first-rate education at virtually no cost to the students. Even as late as the mid-1980s tuition for residents of California at universities such as UC Berkeley and UCLA was in the neighborhood of $1,300 per year.
In 1966 with mounting unrest in the inner cities and increasing campus protests against the war in Vietnam Ronald Reagan easily defeated Pat Brown who was running for a third term as California’s governor. Reagan acknowledged the importance of Brown’s investments in infrastructure and education and its role in California’s economic expansion.
Early in his first term as governor Ronald Reagan signed into law a significant increase in state taxes in California. And the boom continued unabated. (As an aside, some consider it impolite to note that Reagan signed a liberalized abortion law into effect in 1967. Anyway, it was the era of free love.)
Ronald Reagan would go on to win two landslide elections as the 40th president of the United States. He would sign into law the Simpson-Mazzoli Act which amnestied millions of undocumented immigrants. Reagan signed into law the Consolidated Omnibus Budget Reconciliation Act (COBRA) which gave the United States a rudimentary form of national healthcare. Participating hospitals (those accepting Medicare and Medicaid) could not turn away anyone, regardless of legal status, from emergency room care. It should be noted most hospitals in the United States are participating hospitals.
During his eight years in office President Reagan tripled the national debt which raises one question: If he was still running could Ronald Reagan receive the current Democratic Party’s nomination for president or would he be considered too socialistic for their tastes? There is an ebb and flow to American history.
The post-World War Two US economic boom was also characterized by extremely high personal and corporate tax rates. That’s right. One of the greatest economic expansions in the history of mankind was marked by high personal and corporate income tax rates. Billions were spent on super highways, education, and scientific research funded by the American taxpayer. Income tax rates on individuals at the top margin of the income spectrum were over 90% as late as 1964. Income tax rates for corporate America were over 50% and effective rates, that is what is collected after certain deductions, were extremely high.
Modern computer technology, satellites and the internet arose out of massive investments at the federal government level and now have been passed on to the “private” sector. This is what Dr. Noam Chomsky referred to as state capitalism. As our economy evolves it has been noted that losses are socialized (see 2008) and the profits from taxpayer-subsidized government investment have been privatized.
Historian Colonel Douglas Macgregor points out that during the 1950s President Eisenhower focused on paying off the World War Two debt and despite high tax rates the economy experienced solid non-inflationary growth.
Only when President Kennedy decided that taxes needed to be cut did the US taxpayers see relief. Kennedy rightly believed that there were too many unemployed people in the early 1960s and that cutting taxes would spur private investment. Kennedy did not live to see the 1964 Revenue Act signed into law by President Johnson. Once taxes were reduced significantly the economic expansion gained even more steam.
Even though taxes were cut in 1964 rates remained relatively high. To say the least the relationship between taxes and prosperity is not as simple as some sloganeers would have us believe. The key to having a vibrant and investable economy is to focus on the basics such as modern infrastructure, investments in education, alternative energy sources and an understanding that government can help underwrite the necessary work that needs to be done to have a sustained prosperity. The history of the United States demonstrates that the relationship between business and government is not adversarial but symbiotic.
So when someone in the Economics Department at Hillsdale College asks the question “Have you ever known a country to tax itself into prosperity?” you might want to direct them to the nearest mirror.
Dave Pilliod is a Village of Swanton councilman