The blog is a view of life, science, politics and education from an engineering perspective. As engineers, we are taught to view the world objectively. We can hope, believe and calculate a particular outcome, but natural laws are inflexible and pay no heed to who we are or what we believe. We must approach the objective dispassionately, while compensating for our own distorted perceptions. Balance is also a key element; balancing between the ideal and the pragmatic, balancing cost and functionality, balancing analysis with action, etc.
Scheduling routine critical self-analysis is the foundation to objectivity. If we do not fully understand and compensate for our own failures, tendencies, habits and skewed thought processes, we will not see the world as it is. Without a regular critical self-analysis we will see the world as we are and then fall prey to self-delusion.
Failure is a great teacher. When failure is coupled with perseverance, it produces the fruit of patience and humility. An engineer, fresh out of engineering school is typically set up for failure early and often. The failure breaks the new engineer of any ideas of self-importance, arrogance and book smarts. Only then can the new engineer be formed and molded into a productive element in the industry.
When discussing the increase in tax rates, not all consequences of the increase are being analyzed. A big factor to consider when raising taxes is that people will not want to pay more in taxes and will do just about anything to avoid paying taxes.
Effects of tax rate increase in Britain
In the 2009 tax year in Britain, more than 16,000 people reported annual income of more than 1 million pounds (equal to about $1.6 million today). Then in late 2009, Prime Minister Gordon Brown, a member of the Labour Party, introduced a new 50 percent top income tax rate for high-income earners. After that, the number of people reporting income of at least 1 million pounds fell to 6,000.
“It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes,” The Telegraph reported.
Instead of raising revenue, the tax hike cost the U.K. 7 billion pounds ($11.2 billion) in lost revenue for 2011.
In 2011, the government of Conservative Party Prime Minister David Cameron has announced that it will lower the top rate from 50 percent to 45 percent, a move the Labour Party officials have called a “tax cut for millionaires.”
Since Cameron’s government announced the lower top rate, the number of Britons reporting income of at least 1 million pounds has risen to 10,000.
Anecdotal data from France
Mayor Daniel Senesael of Nechin, about a kilometer inside Belgium near the French city of Lille, claims that French actor Gerard Depardieu has bought a home and set up legal residence in his small town, lured by the food, the people, the lifestyle — and lower tax rates than back home.
The Socialist government under French President Francois Hollande has infuriated many ultra-rich in France by presenting a 2013 budget that would tax top earners at 75 percent over the first €1 million of annual income. Belgium's top rate is 50 percent.
Depardieu is not alone in his quest for lower taxes. Alexander Kraft, head of Sotheby's Realty, France, said: "The result of the presidential election has had a real impact on our sales. “A large number of wealthy French families are leaving the country as a direct result of the proposals of the new government.”
Inquiries from wealthy French for London homes worth more than five million pounds soared by 30 per cent in the first three months of this year, UK estate agency statistics showed.
Gilles Martin, a Swiss tax consultant, reported the same trend. "Since the socialists came to power in France, I have been deluged with inquiries from rich French people who would rather pay their tax in Switzerland," he told Switzerland's 20 Minutes newspaper.
Jean-Marc Ayrault responded to the report of flight of the wealthy with an outburst. "Those who are seeking exile abroad are not those who are scared of becoming poor," the prime minister declared after unveiling sweeping anti-poverty measures to help those hit by the economic crisis.
These individuals are leaving "because they want to get even richer," he said. "We cannot fight poverty if those with the most, and sometimes with a lot, do not show solidarity and a bit of generosity," he added.
The Hollande government is concerned that the tax increases may not track according to the projected revenues. Mr Hollande has since introduced other hefty new charges on capital gains and inheritance, while increasing France's wealth tax and an exit tax for entrepreneurs selling their companies. The changes are designed to tap into the wealthy even if they choose to leave.
While Mr Ayrault opted not to mention Mr Depardieu yesterday, the Gallic star drew fierce criticism from liberal politicians and commentators.
Socialist MP Yann Galut called for the actor to be "stripped of his nationality" if he failed to pay his dues in his mother country, saying the law should be changed to enable such a punishment.
Benoît Hamon, the consumption minister, said the move amounted to giving France "the finger" and was "anti-patriotic".
However, Depardieu is not alone as an ex-pat in Nechin. Among Mr Depardieu's neighbors in the village of Nechin will be members of the Mulliez family, who own the Auchan supermarket chain.
Since 2007, at least 18 states have raised their cigarette taxes to over $2 per pack. In New York, the tax on cigarettes is $4.35 a pack, and an additional tax in New York City boosts the total to $6.46 a pack; $1.50 is New York City tax; $0.61 Prepaid Sales Tax.
But the cigarette tax in Virginia is just 30 cents a pack, so smugglers can buy bulk quantities of smokes in Virginia and sell them in New York and other high-tax states at a huge profit — a racket known to police as “smurfing,” according to The Economist.
One individual, who was apprehended, claims to have sold on average 5000 packs of cigarettes per month at a profit of $2 per pack. The cigarettes are purchased in low tax states such as Virginia or from Indian Reservations and resold in New York City.
The Bureau of Alcohol, Tobacco, Firearms and Explosives estimates that illegal cigarette sales cost local, state and federal governments nearly $10 billion a year.
The bottom line is that New York is taking in much less revenue than expected from the increases in cigarette taxes.
New York City is spending a tremendous amount of time and effort to reduce tax evasion. The following statement was posted in October 2012 by the NYC department of Finance:
The sale of cigarettes within New York State and New York City is regulated by federal, state, and local law and enforced by the New York City Department of Finance and the New York State Department of Taxation and Finance. Finance is engaged in an active campaign against those who try to evade the cigarette tax. This includes an advertising campaign to educate the public, an ongoing effort to bill and collect from those who have purchased untaxed cigarettes, and legal action against those who engage in cigarette tax evasion and fraud. We are also placing sellers, advertisers, shippers, and purchasers on notice and informing them of their legal obligations and responsibilities concerning New York City and State laws.
I seriously doubt that the sternly worded statement will change the purchasing habits of New York residents.
The tax increases approved by the Government of Mariano Rajoy in late 2011, includes increasing the income tax rate, a tax on savings, increases in VAT taxes and sales taxes. These taxes were designed to generate a 4.3% increase in tax revenue. However, from the data compiled in early December 2012, the results show a decrease in revenue by 3.5%.
To deal with the shortfall the government is considering an additional round of taxation: remove the shelter deduction retroactively (about 6,000 million euros) of credits for contributions to private pension plans (2,000 million); impose an increase and not only to gas taxes, but also to fuels, and an excise tax increase (alcohol, tobacco, soft drinks…) or implement new environmental taxes.
My guess is that the new taxes will not help achieve the desired revenues, either. People will work hard to avoid paying it.
According to MSN, about 100,000 more people moved away from California in 2011 than relocated to the Golden State, according to the latest report from the U.S. Census Bureau. The trend for 2012 is showing an increase in the exodus from California when compared to 2011.
So, where are these Californians going? The Census Bureau calculated that the most popular destination is Texas, with 58,992 residents relocating there in 2011 along with a number of California companies.
Joel Kotkin, demographer, addresses the causes of the exodus, "Basically, if you don't own a piece of Facebook or Google and you haven't robbed a bank and don't have rich parents, then your chances of being able to buy a house or raise a family in the Bay Area or in most of coastal California is pretty weak." The Golden State's fastest-growing entity is government and its biggest product is red tape.
Housing is merely one front of what he calls the "progressive war on the middle class." Another is the cap-and-trade law AB32, which will raise the cost of energy and drive out manufacturing jobs without making even a dent in global carbon emissions. Then there are the renewable portfolio standards, which mandate that a third of the state's energy come from renewable sources like wind and the sun by 2020. California's electricity prices are already 50% higher than the national average.
The people who are leaving are upper middle class. Their income has been dramatically affected by the tax increases in 2009. This is already on top of the high cost of living.
A worker in Wichita might not consider those earning $250,000 a year ‘middle class’ it would be considered wealthy, but "if you're a guy working for a Silicon Valley company and you're married and you're thinking about having your first kid, and your family makes $250k a year, you can't buy a closet in the Bay Area," Mr. Kotkin says. "But for $250k a year, you can live pretty damn well in Salt Lake City. And you might be able to send your kids to private schools and own a three-bedroom, four-bath house."
Mr. Kotkin lists four "growth corridors": the Gulf Coast, the Great Plains, the Intermountain West, and the Southeast. All of these regions have lower costs of living, lower taxes, relatively relaxed regulatory environments, and critical natural resources such as oil and natural gas.
Take Salt Lake City. "Almost all of the major tech companies have moved stuff to Salt Lake City." That includes Twitter, Adobe, eBay and Oracle.
Then there's Texas, which is on a mission to steal California's tech hegemony. Apple just announced that it's building a $304 million campus and adding 3,600 jobs in Austin. Facebook established operations there last year, and eBay plans to add 1,000 new jobs there as well.
In a study performed by the Manhattan Institute for Policy Research, the data suggest that many cost drivers—taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power, and high labor costs—are driving businesses to locate outside California.
Proposition 30, which passed a referendum in November, is projected to raise $6 billion in additional revenues. However, the projected revenue increases will not close the gap in the $16 billion deficit. The state spending will shoot to $130.7 billion this year, up $8.9 billion over last year.
The State Budget Crisis task force estimated that the burden of debt totaled at least $167 billion and as much as $335 billion. In addition to this debt, California still owes the Federal Government $14 billion in unemployment compensation, and public schools $10 billion.
Paying down the state’s ever growing credit card bill is on track to spend 8.9%, or about $8.6 billion, of the state general fund budget in the current fiscal year.
Even if California fully procures the $6 billion in revenue from proposition 30, next year’s deficit will be larger than this year’s deficit…prompting new rounds of tax increases…prompting an increase in the rate of exodus.
Preserving one's wealth is truly a strong driving force. However, this force is not generally recognized by politicians who attempt to separate people from their money.