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Mar 10

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Has California’s tax on the rich driven out the poor and middle class?

A recent article from the Wall Street Journal identifies a paradox: (i) “conservative lore” predicted rich people would leave California in response to a massive tax increase, yet, in fact, (ii) poor and middle class people have left instead.

As evidence, the article summarizes the following about those who have left the state:

1. Their median income is only $40,000, compared to a statewide median of $60,000.

2. Only 10% have college degrees while 30% of Californians have college degrees.

3. About 40% of them are Hispanic.

The third point is entirely superfluous since, according to the U.S. Census Bureau, Hispanics make up roughly 40% of the state’s population.

As for the first and second points, there really is only one point since low education is highly correlated with low income.

Meanwhile, the article notes that California has attracted more rich people, or, more specifically, those with incomes over $200,000, than it has lost. So much for predictions of the rich abandoning the state, right?

Not really.

The article’s period of analysis – the basis for all its population summary statistics – considers the population that has abandoned California since 2005. A lot has happened since 2005 – a hot housing market, a bust, a major recession, two presidential elections, a mild recovery, and a new California governor, among other things — but almost none of what has happened is an effect of California’s tax increase. The “millionaire’s tax” passed only last November. It is far too early to begin drawing conclusions about how this tax increase has influenced the demographics of California’s departing population.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2013/03/has-californias-tax-on-the-rich-driven-out-the-poor-and-middle-class/

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