Milton Friedman’s Legacy Lives On

milton-friedmanMilton Friedman was a world-class economist, won the Nobel Prize for Economics in 1976, and passed away in 2006. Friedman championed repeal of the death tax (estate tax) for years. In 2001 he wrote an open letter on the subject and convinced 276 economists to sign on. This week the national Family Business Coalition, of which the Family Business Association of California (FBA) is a member, has announced the letter now has 723 economists signed on including four winners of the Nobel Prize. Here are a few excerpts from Dr. Friedman’s letter:

“Spend your money on riotous living – no tax; leave your money to your children – the tax collector gets paid first. That is the message sent by the estate tax. It is a bad message and the estate tax is a bad tax.

The basic argument against the estate tax is moral. It taxes virtue – living frugally and accumulating wealth. It discourages saving and asset accumulation and encourages wasteful spending. It wastes the talent of able people, both those engaged in enforcing the tax and the probably even greater number engaged in devising arrangements to escape the tax.

The income used to accumulate the assets left at death was taxed when it was received; the earnings on the assets were taxed year after year; so, the estate tax is a second or third layer of taxation on the same assets.

Death should not be a taxable event. The estate tax should be repealed.”

The current federal death tax comes into play when an estate is valued at over $5.49 million and is then 40% of anything over that. It doesn’t take long in California for an estate to get to that size if there is real property and equipment involved. Farmers are particularly hard-hit as many are “land rich and cash poor” meaning they have to sell some or all of the property to pay the death tax bill, saying goodbye to some or all of the family farm.

Just when California families saw some hope as the President and Congress are looking at eliminating the federal death tax in the current round of tax reform proposals, State Senator Scott Wiener of San Francisco introduced a bill that would put the creation of an equal tax, just for Californians, on the state ballot in the event the federal tax is eliminated. It must go to the voters because two initiatives passed by the voters in 1982 prohibit an estate tax in California, and that can only be changed by the voters. Family businesses vigorously oppose a death tax for Californians. FBA leads a coalition of 40 associations opposed to the bill. To again quote Dr. Friedman, “It is a bad message and a bad tax. Death shouldn’t be a taxable event.”

Executive Director of the Family Business Association.

This article was originally published by Fox and Hounds Daily

A Short History of Proposition 13

(Note from the author): Proposition 13, the 1978 property tax measure, continues to be in the news in California with talk of reforms in some quarters. Just this week, the Public Policy Institute of California polled some issues related to Prop 13. The poll found that 66% of likely voters found Prop 13 to be a good thing for California. That included 78% of Republicans, 62% of Independents, and 58% of Democrats. With 13 still making news in California, it is probably an opportune time to publish the text of a speech I gave a few months ago on the history of Proposition 13.)

Let me take you back to 1966 to Newhall, California right here in Los Angeles County, to an item that appeared in the local Newhall Signal newspaper. It came with a picture of an elderly couple standing before their house. It would not be unkind to call it a shack. The house was assessed for taxes at the property’s highest and best use, a standard used by assessors at the time. Since an apartment building had been built close by, this elderly couple’s home was assessed as if an apartment building was built there. The couple’s tax bill, in 1966 dollars, was $1800 a year. Their total income was $1900 a year.

Four years earlier, a retired, civic minded, combative businessman, Howard Jarvis began an effort to reform the property tax system. He said he worked with “ordinary people” to do something about taxes. He called it “grand felony theft” when people, like the Newhall couple, lost their homes to the taxman.

And he wasn’t alone in protesting outrageous taxes. Remember this was about the time George Harrison wrote, and the Beatles’ sang, Should five percent appear too small, Be thankful I don’t take it all, Cause I’m the Taxman.

Howard Jarvis worked 15 years on property tax reform. He submitted or worked on a number of initiative proposals that either didn’t qualify for the ballot or were defeated at the polls.

Meanwhile, the situation got worse. What happened was property values were increasing dramatically in the 1970s—kind of like now. Property taxes are a function of the tax rate and the value of the property. If the tax rates were not adjusted but the property value increased, taxes zoomed up.

In some instances people bribed assessors to keep their property values low and reduce their taxes. Some assessors were caught and they went to prison – one committed suicide. Officials decided something had to be done. They computerized assessments so when a property sold all the property around it would automatically have their assessments increased and their taxes increased with the increased valuation.

In San Francisco, bumper stickers soon appeared that read: “Bring back the crooked assessor!”

Speaking of San Francisco, one San Francisco government official told the San Francisco Chronicle that before Prop 13 ‘the mayor had a relatively easy job, you just add up all your revenues and all your expenses and then you just SOCKED it to the taxpayer.’

That was the environment when Howard Jarvis and Paul Gann combined to get a record number of signatures for Prop 13, in every county, practically all through volunteer signature gatherers.

Many members from both political parties and most of the state’s special interests from business to labor opposed Prop 13. Yet the fund raising was fairly even. The No side had more, and they got it in large donations, but the many small donations from homeowners offset the large donations enough to keep the Yes on 13 side in the game.

Milton Friedman, the Nobel Prize winning economist, made a television ad for Prop 13. Ronald Reagan did a radio ad. Reagan’s radio ad said Prop 13 would protect the American Dream. Marty Anderson, Reagan’s chief economist for the 1980 presidential campaign, told me once 13 passed it gave the Reagan campaign impetus to make taxes a lead issue in the presidential campaign.

While the other side may have had more money, the campaign was high profile and the media helped. KABC-TV in Los Angeles held a debate on the news for 5 to 10 minutes every night for weeks. Howard Jarvis taking on all comers.

It wasn’t a fair fight – for the other guys. Jarvis said, “When you see politicians and bankers and union leaders standing together against something you’re for, you know there is no way in the world you can be wrong.”

Prop 13 passed two to one on Election Day, June 6, 1978. It capped the property tax rate, allowed a limited increase for inflation, reassessments on sale of property, and required a supermajority vote in the legislature for state taxes and a vote of the people on local tax increases.

It was challenged in the courts, of course. The California Supreme Court said it was constitutional…that the acquisition value system—taxes are set when you acquired the property—was reasonable and fairer than the system in place before 13.

But that wasn’t the only court challenge. In the early 1990s, a Prop 13 case made it to the United States Supreme Court.

This delighted the folks who had longed hope to see the end of Prop 13. The Long Beach Press editorial the morning of the hearing before the U.S. Supreme Court cried, “Off with its Head!”

Didn’t work out that way. As with the California Supreme Court, there was only one dissenting vote against Prop 13.

Justice Harry Blackmun, who wrote the majority opinion, found Prop 13 was constitutional, that the state had a legitimate interest in neighborhood preservation and stability and could set tax laws to discourage rapid turnover of property in homes and businesses to discourage displacement of mom and pop stores by newer chain operations.

Blackmun also wrote that someone acquiring property doesn’t require the same protection as someone who owns property and could be subjected to jarring tax increases.

The case against Prop 13 was based on the issue that side-by-side similar properties pay different taxes. Renowned economist Adam Smith in his work, Wealth of Nations, said certainty in taxation was much more important than equality. However, I prefer how a writer in a Northern California newspaper put it. Proposition 13 reminded her of her grandmother’s quilt. It is made up of different patches but sewn together it keeps everyone warm.

Even with Prop 13 upheld by the courts it comes under constant attack as you know.

From the ridiculous – a track coach said his shot puts were lost in tall grass because the grass was not cut as frequently because of Prop 13, to the more serious, when the Bakersfield Californian newspaper asked: Is Proposition 13 killing children because we don’t have enough measles serum in this county? To the editorial cartoon in the Los Angeles Times after the Loma Prieta earthquake in the Bay Area that showed a car crushed by a freeway and the license plate read, Prop 13. And my favorite in the New Republic, which said the reason O.J. Simpson was found not guilty in his criminal trial was because of Proposition 13. The reasoning was that because of the tax cuts Los Angeles city and county did not have the funds to hire competent police and corner officials. No matter that at that time, LAPD officers were paid more than police in New York and Chicago.

Which is why Howard Jarvis created a taxpayer organization, the Howard Jarvis Taxpayers Association, to carry on the fight and the defense of Prop 13. As Howard used to say, “A ship can’t sail on yesterday’s wind.”

Prop 13 was revolutionary because for the first time it gave certainty to the taxpayer instead of the tax collector.

Finally let me close with the following assessment of Prop 13 when it hit it’s 20th anniversary: “Proposition 13 is 20 years old and it’s time to proclaim the tax cutting measure a stunning success. The brainchild of Howard Jarvis and others has been vilified by critics for two decades and blamed for much of what ails California. But, at the heart of it, the measure did exactly what Jarvis promised …Proposition 13 provided a substantial and permanent reduction in soaring property tax levels and brought stability to a tax system that had been rife with corruption and subject to the volatile whims of the housing market.”

So said the Editorial in —ready for it –the Los Angeles Times!

Originally published on Fox and Hounds Daily