A coalition of more than 130 economists is urging voters to reject a destructive wealth tax.
Much of the damage of Proposition 40, a ballot measure to impose a 5 percent wealth tax on California billionaires’ assets, has already been done. At least seven billionaires have fled the state preemptively, taking with them $536 billion in wealth (or nearly a third of the tax’s supposed base) and many billions of dollars in annual income. Consequently, researchers at the Stanford-based Hoover Institution estimate that the “billionaire tax,” meant to raise $100 billion, will end up losing the state money.
Yet Californians still have a chance to partially salvage the situation by voting down the wealth tax on Tuesday, showing the state’s remaining entrepreneurs and investors that blatant confiscation does not enjoy majority support and shielding their incentives to keep building wealth. A large coalition of economists is now urging voters to slam the brakes.
The group includes four Nobel laureates, nine former U.S. government officials, and 120 other economists and academics — all signing onto a document that details the major problems with a state wealth tax. In short, they believe “that a wealth tax would introduce significant economic costs, administrative challenges, legal uncertainty, and unintended consequences that could undermine California’s long-term economic prosperity.”
Many of the faults should be familiar to conservatives, but Californians may need a reminder. By effectively taxing capital gains at extraordinary marginal rates, a wealth tax would likely “reduce future incentives to save, invest, and build businesses.” A cutback in investment puts all the tax’s alleged fiscal benefits at risk. “California already has the highest state income tax rate in the nation, making behavioral responses to further taxation particularly acute.”
Legal and administrative challenges also threaten revenue. The wealth tax may be struck down in courts or prove unworkable, but the mere threat of confiscation may push “high-net-worth individuals and entrepreneurs to relocate or shift future investment elsewhere, potentially weakening the state’s long-term tax base.” California shouldn’t kill the golden goose — “its ability to attract talent, capital, innovation, and entrepreneurial activity” — that keeps the state flush with money and opportunity.
French economist and wealth-tax enthusiast Gabriel Zucman has tried to rebut warnings of a wealth exodus, arguing that long-term behavioral responses to a one-time tax are irrational. If Proposition 4o passes, there’s nothing billionaires living in California as of this year can do to avoid it, so they might as well stick around and keep investing after a haircut.
The cautious economists respond, “There is no guarantee or commitment device that can ensure that a wealth tax can only be imposed once. There is always a risk that another wealth tax could be imposed again. Such reputational harm could further drive capital and taxpayers out of California.” Indeed, Proposition 4o would make a future wealth tax easier by authorizing the legislature to extend and expand the 5 percent levy to additional years and smaller net worths. Billionaires aren’t keen to be robbed twice.
The economists are led by Jon Hartley, a professor at the University of Texas at Austin and occasional NR contributor. Hartley told NR that he “felt it was important to highlight opposition among economists who span both Democrat and Republican to the California wealth tax, a group which includes Nobel Laureates, former senior government officials, and academic economists.”
Hartley believes “there will be fairly permanent damage done to California’s reputation as a place to do business and invest if it passes. Certainly some damage has been done already,” but much worse can happen if the tax passes: “the loss in investment (Mark Cuban says he’s not investing in California-based startups if the law passes), illiquidity (how are people going to divest illiquid stocks), administrative costs associated with valuing all the assets, legal uncertainty around a number of issues with the tax like retroactivity.”
“The political economy reality is there is no such thing as only a one-time tax, and there is no commitment device to prevent them from trying it again, whether it passes or not. I wouldn’t be surprised if there was another similar effort in the years to come,” Hartley said.
A national wealth tax would face many of the same difficulties, but a state-level attempt is especially foolish since taxpayers can simply move. Hartley said the tax “goes against 100 years of optimal tax theory” recommending that governments should tax immobile assets such as land and housing, not asset portfolios that can escape the state with an address change. On Tuesday, voters in California can either staunch the bleeding or accelerate it.