California voters will decide this November on a 5 percent tax on billionaires’ wealth, but new research challenges the economics behind it, and billionaire departures have already shrunk the very base it aims to tax
A Tax On Wealth, Once
This November, California voters will decide Proposition 40, a ballot measure that would impose what its supporters describe as a one-time five percent tax on the wealth of people with assets above one billion dollars. A Public Policy Institute of California survey conducted in early September found 52 percent support. Two other measures, Propositions 41 and 42, polled at 51 and 54 percent, and under California law, where provisions conflict, the measure with the most yes votes prevails. The outcome is uncertain, and the stakes for the state’s economy are high.
Reason contributing editor J.D. Tuccille laid out the case against in a September 18 piece headlined California’s proposed billionaire tax is based on bad research.
The Research Question
Tuccille’s article draws on a report by Kristian Fors, a research fellow at the Independent Institute, published September 14. The report argues that the case for the tax relies heavily on research by University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman, who have argued that the very wealthy pay lower effective tax rates than ordinary workers. Fors contends that their work uses nonstandard corporate tax accounting and was not peer-reviewed, and that the Forbes 400 data used in such analyses overstates net worth. Adjusting for those issues, the report estimates an average effective tax rate of 38 percent for the wealthiest Americans in 2018 through 2020, compared with the 24 percent figure Saez and Zucman claimed.
Debates over effective tax rates are technical, and economists disagree in good faith. But if the premise that billionaires pay less than everyone else is wrong, much of the moral and political case for a special wealth tax weakens considerably.
The Base Is Already Leaving
The more immediate problem is practical. Wealth is mobile. People with billions of dollars can, and do, move to states with lower taxes. Reason reported in January that California billionaires are leaving the state in response to the proposed wealth tax. A Hoover Institution study published in March found that departures had already removed 536 billion dollars, nearly 30 percent of aggregate billionaire wealth, from the state’s tax base.
That is the paradox of wealth taxes. They target a base that can leave, and the more credible the threat of the tax, the more of that base departs before it is collected. California also depends heavily on high earners for its income tax revenue. When they leave, the state loses not only a one-time wealth tax payment but years of ordinary income tax, capital gains tax and the investment, employment and philanthropy that come with them.
There are also practical questions about how such a tax would be administered. Valuing publicly traded shares is straightforward. Valuing a stake in a private company, a collection of art, a ranch or a portfolio of real estate is not. Wealth tax regimes elsewhere have required armies of assessors, produced endless disputes and invited aggressive planning by the very people they target. Those costs fall on taxpayers and the courts, not just on billionaires.
One Time Rarely Means One Time
Tuccille describes the measure as supposedly one-time, and that skepticism is warranted. Taxes introduced as temporary or exceptional have a long history of becoming permanent. Once the machinery exists to value and tax private wealth, including stakes in private companies, art and real estate, the temptation to use it again will be strong, and the threshold could fall over time. Wealth taxes in Europe were once common. Most countries that tried them abandoned them, citing administrative costs, valuation disputes and capital flight.
The Surf Town Perspective
It might seem that a tax on billionaires has nothing to do with ordinary Californians. But the state’s economy is an ecosystem. Founders and investors fund the start-ups that employ engineers, designers and service workers. Wealthy residents buy homes, hire contractors and support local businesses, including in coastal communities from Malibu to Santa Cruz. When capital leaves, the effects ripple through the economy, often landing on workers far from the boardroom.
There is also a principle at stake. A tax that targets a small group because they are unpopular, rather than because the tax is sound policy, sets a precedent. Today it is billionaires. Tomorrow it may be anyone the majority decides has too much. Surfers who value independence, and who have often found themselves on the wrong side of local authorities over beach access and lifestyle, should be wary of a politics that treats any minority’s property as fair game.
What Would Help Instead
California’s real fiscal problems stem from spending growth, volatile revenue heavily dependent on a few high earners and costly programs with uncertain results. A more durable approach would broaden the tax base and lower rates, make the state more attractive for investment and residence, and restrain spending growth. Reforms that reduce the cost of housing, energy and regulation would do more for ordinary Californians than a one-time raid on a shrinking pool of billionaires.
The Vote
Voters will make their own choice in November. Those weighing Proposition 40 should consider not just the appeal of taxing the very rich, but the evidence on whether wealth taxes work, the fact that the targeted wealth is already leaving and the precedent such a tax would set. A wave can look perfect from the beach and close out the moment you stand up. Proposition 40 may be that kind of wave.