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If the US states are, as a former U.S. Supreme Court Justice Louis Brandeis that being said, the “democracy labs,” then it’s worth watching up close what’s happening in California right now.
The threat of tax increases and the “submerging the rich” political atmosphere has led some wealthy Golden State residents, including several tech entrepreneurs, to to leave for cheaper pastures like Austin or Miami. This, in turn, has sparked concern about greater migration that would have an impact not only on the state’s tax base, but on the growth and innovation that have made California the world’s fifth largest economy.
It is an exceptionally full situation. Although today no one has much sympathy for rich people or businesses (witness to the fury recently justified by the ProPublica leaks showing how little tax the richest Americans pay), or really believe in the drip economy, the threat of tax and regulatory arbitrage from other states is real.
The good news is that California is applying some creative thinking to the problem. What if there was another way to harness the wealth of the company and the citizens for the benefit of all?
One of these ideas that is gaining popularity is what has been called “predistribution.” Unlike traditional methods of redistribution, in which the state taxes existing wealth and uses it to strengthen various projects and components, pre-distribution consists of harnessing capital in the same way that investors do, and then to use capital growth income (which as we know far exceeds income growth) to finance the public sector.
The idea of allowing more people to become capital owners has long been working. He CalSavers program, created in 2016, allows individuals, such as contract workers or self-employed contractors who do not have access to private sector retirement accounts, to contribute to professionally managed funds in a state-managed system.
Likewise, Proposition 24, the California Privacy Rights Act, was approved last year and will take effect in 2023. It actually creates a kind of stealthy sovereign wealth fund, in which 93 cents of every dollar is charged for fees paid by companies for violations of the Privacy (which, given the nature of surveillance capitalism, is likely to be substantial) can be invested by the Treasury, and the proceeds of any gain used to pay for government operations. “It’s a way to help us not have to raise taxes,” says California Senate Majority Leader Robert Hertzberg.
He, along with some very wealthy Californians like former Google CEO Eric Schmidt and Snap founder Evan Spiegel, have proposed that the concept be expanded to something called “universal core capital.” The idea is that initial equity contributions from companies or philanthropists could be invested in a fund that Californians should use for issues such as retirement security, health, and so on.
Already, in the 2021-2022 budget, Gavin Newsom, the governor of California, has proposed using part of the state’s fiscal surplus this year, which along with Covid’s federal relief have provided an extra $ 100 million in public coffers: to start college accounts for all low-income elementary primary students in the state.
One can imagine going further and making the state take a small equity position, perhaps 3-5%, in emerging companies, as they like in countries Israel or Finland I already do. Given that the current value of publicly traded companies in California is approximately $ 13 billion, that doesn’t mean any change. If the state could have taken even a small stake in top-tier companies a few decades ago, perhaps there would be far less of the “Occupy” Silicon Valley environment in California right now.
In my opinion, predistribution should not replace taxation. It could not fill the gap and taxes are, in any case, a way to strengthen the sense of duty and civic belonging. But it should be seen as a new stream of revenue especially suited for an era where the effects of the network and intangible assets they are concentrating wealth not only on fewer hands, but on fewer companies that can generate exaggerated profits with far fewer employees.
It could also help better align public and private benefits and incentives. The massive wealth accumulated by leading companies is due in part to the strength of public commons: good schools, decent infrastructure, basic research, and so on. How economists like it Mariana Mazzucato consider frequently, why should taxpayers pick up the bill, for example, to put high-speed fiber without gaining any commercial advantage?
In fact, if predistribution works in the California lab, I hope it is adopted in some way at the federal level. The Obama administration tried to implement its own version of the country-wide CalSavers program, called myRA, but failed in part because the funds were only invested in super-safe low-yield Treasury bonds at a time when the market as a whole was rising much faster.
Even in this politically polarized moment, it is an idea that perhaps the time has come. The distribution forecast is supported by unlikely bedfellows like the hedge funder Ray Dalio and left-wing economist Joseph Stiglitz. Perhaps because, while not fundamentally altering the market system, it expands ownership of the shares: a mixture of capitalism and socialism appropriate for our time.
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