Hi, I’m Ernie Copley. I’m a college business teacher and a financial planner in Maine.
Recently, I read a position paper on Question 2 by a Ms. Sarah Austin. Ms. Austin works for a left-wing think tank, the Maine Center for Economic Policy (“MECEP”). Her position paper is based on dubious assumptions and a near-total ignorance of how investors manage their money.
First, let’s look at the world through the eyes of one of the intended targets of the proposed tax. We’ll call this hypothetical fellow Walter Wealthy.
The underlying assumption behind Ms. Austin’s analysis of Question 2 is that all income belongs to the government. The government, in turn, generously agrees to give Walter back some of his income. Any reduction in the amount of money he sends to Augusta each year represents a “tax break” – that is, a gift from the Great Collective, which owns all income. Evidently, MECEP is upset because the Great Collective would have more of Walter’s money to distribute to the teacher’s unions if only prior legislatures hadn’t lowered marginal income tax rates.
Nowhere in Ms. Austin’s leftist analysis do we see any commentary on what percentage of Maine’s income tax burden is already borne by the top 1%, the top 5% and the top 10%. MECEP is silent about how much of Maine income tax burden is already shouldered by their class enemies. Why not?
Even if one agreed with MECEP, what past legislatures did or did not do is irrelevant to the current ballot proposal. In accurate financial analyses, past decisions are what financial analysts call sunk costs – meaning it’s water under the bridge. If one wants to raise state government revenue, the only relevant issue for financial decision makers is the impact at the margin. The margin in this case is a 3% surtax on incomes over $200,000 per year.
In MECEP’s socialist utopia, people like Walter are assumed to be incredibly stupid. They do not respond to incentives (or disincentives). They’re also too dumb to hire competent financial planners, insurance agents, accountants, tax attorneys and stock brokers. No, wait – they’re precisely the people that can get the best financial advice money can buy. Financial planners like me will help Walter reduce his reported taxable income to come in under the $200,000 wire and beat the tax.
At the top of the list is simply moving to Florida, which has no State income tax. Apparently Ms. Austin wants more of Maine’s most successful citizens to retire there as soon as possible. I suspect Walter was planning to retire there anyway, but now I guess he’ll have to accelerate his plans.
Another way to beat the tax (and stay put) will be for Walter to switch his bond investments from taxable corporate bonds, preferred stock and dividend-paying stocks to Maine municipal bonds. The interest on those is free of both state and federal income tax. Yet another way to beat the tax will be to sell some of his taxable investments and buy a tax-deferred annuity: income from these insurance contracts is tax deferred until Walter begins taking the money out after he retires. By the time that happens, he’ll probably be a Florida resident.
One assumes Ms. Austin and other such leftists also want a bigger slice of Walter’s capital gains. But like other taxpayers, Walter won’t pay capital gains taxes until he sells appreciated assets. Thus I guess he’ll just hang onto his appreciated stocks a little longer. No sale, no tax.
He may also buy a bigger house, at least as long as he lives in Maine. The resulting larger mortgage interest deduction should also help him get his income down below $200,000. Why Ms. Austin thinks Maine’s educators will benefit if Walter buys a bigger house is not clear from the MECEP position paper.
But Question 2 isn’t really about education: it’s about class warfare.
Ernest Lee Copley III is a community college business instructor, a money manager and a financial planner. Walter Wealthy is fictional, but he is based on a composite of various wealthy people Mr. Copley has advised over the years.
