The true power of taxes is the power to influence behavior. Drop the notion that taxes are about raising revenue for the government to help provide services to the public. Ask any economist and they will tell you that government is basically the most economically inefficient way to provide services to the public. However, if the government does not provide these services, who will? Can we rely on our neighbor to fill potholes; will we volunteer to teach 9th grade science; are we eager to donate a percentage of our wages to catch drunk drivers? Clearly, government must step in for the betterment of society, but the pure bureaucratic nature of government chews up too much funds in administrative costs. So, the question becomes, how does the government coerce individual taxpayers to directly provide for the betterment of society? The answer: Taxes.
Case in point: the Qualified Small Business Stock (QSBS) statute. Without going into too much detail of the statute (Rev & Tax. Code, §§ 18038.5, 18152.5), the law essentially provided a tax incentive for individuals who invested (i.e., bought stock) in small businesses who were mainly located and operated in California. The goal here from the legislative standpoint was generally to encourage wealthy taxpayers to invest money in California start-ups. This way, the government was able to influence the financial behavior of individuals to directly benefit the people and companies of the state of California without having to dilute that investment with administrative expenses. Sounds great, right? So, what’s the problem? Oh, just the U.S. Constitution. According to the penumbra of the halo from the gossamer wings of the reach of the articles of the Constitution, etc., the federal government has the authority to review state taxation to ensure that its laws do not somehow discriminate against interstate commerce. The California court decided that this law gave an unfair advantage to companies in California, against companies from out of state.
Thus ends the incentive provided by the legislature to promote the investment in California start-ups. What do you think? Should the California legislature be providing incentives like this for rich California citizens and not for similar citizens who live in other states? Should the federal government be able to say that this not constitutional? How far does the state and federal governments’ reach control this kind of issue? Let me know what you think the government’s authority should be, and whether you think this judicial decision or the legislative action goes too far.
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