The proposed wealth tax shows only a narrow edge in the polls and is already provoking capital flight.
California’s plan to tax the assets of its wealthiest residents—often described as a billionaire’s tax—enjoys a marginal lead in public opinion as the midterm elections approach, even as two other ballot measures also attract votes that could render the tax unworkable. This creates a high-stakes clash, given that many well-off Californians are already relocating to escape a levy that might compel them to surrender ownership stakes in the businesses they started. Even if the proposal does not pass, a new report argues that it rests on faulty evidence and could unleash extensive economic damage.
A Narrow Polling Edge for the Wealth Tax—and for Competing Measures
A Public Policy Institute of California survey conducted September 4–10 found 52 percent support for Proposition 40, which would apply a one-time 5 percent levy on the wealth of individuals whose assets exceed $1 billion. Intriguingly, 51 percent also back Proposition 41, which requires audits for new taxes and would limit how the wealth tax’s revenues could be allocated, and 54 percent favor Proposition 42, which bans taxes on financial assets. California law states that when provisions of two or more measures approved in the same election conflict, the one with the higher affirmative vote prevails.
These overlapping initiatives could spare Californians from their own misjudgments, because the wealth tax proposal rests on questionable assumptions and could wreak substantial harm on the state’s economy. Unfortunately, a significant amount of damage is already baked in. In March, a Hoover Institution study estimated that affluent individuals departing the state due to fears about Proposition 40 had already removed about $536 billion, or nearly 30 percent of the total wealth of the country’s billionaires, from the tax base.
The Wealth Tax Plan Is Based on Unconventional Accounting
Now a fresh report contends that the proposed wealth tax is not only risky for California’s economic outlook but is also founded on flawed research. Kristian Fors, a research fellow at the Independent Institute, states that “this proposal has been heavily influenced by the work of UC Berkeley professors Emmanuel Saez and Gabriel Zucman to justify wealth taxation.” Saez and Zucman have dominated headlines with claims that the wealthy are undertaxed relative to lower-income Americans. Fors notes, however, that the widely cited figure claiming a 23 percent overall tax rate for the nation’s top 400 households contrasts with their prior estimate, made a year earlier, that the top 1 percent paid about 36 percent; in their most recent year, they report the top 0.001 percent paying around 41 percent, a group including billionaires and ultra-high earners.
According to Fors, the discrepancy arises from how the economists treat corporate income taxes. Standard analyses hold that corporate taxes ultimately bear on shareholders, workers, and consumers as the tax is passed along. This underpins the earlier 41 percent figure for the wealthiest. To arrive at the lower 23 percent, Saez and Zucman employed an atypical method—an approach that garnered headlines but did not undergo peer review.
“Saez and Zucman’s empirical work on the California billionaire tax proposal retains these same unconventional accounting practices from 2019 without addressing their conflict with the mainstream corporate tax incidence literature,” Fors cautions.
The Independent Institute notes that privacy laws prevented Saez and Zucman from using individual income tax data and other financial records. They relied on the Forbes 400 list, and a 2010 IRS study found that the Forbes 400 significantly overstates individuals’ net worth during life when compared with probate records after death. When this discrepancy is accounted for, estimates show an average effective tax rate of about 38 percent between 2018 and 2020, instead of the 24 percent claimed by Saez and Zucman for that period.
Other Economists Echo the Critique
Fors isn’t the first to challenge Saez and Zucman. In 2019, economic historian Phil Magness argued that the pair’s widely publicized data produced a dramatic chart suggesting the top 400 earners’ tax rate fell below that of the bottom half, a pattern that diverged from their earlier work, including a 2018 article with Thomas Piketty. The earlier piece showed a relatively flat trend with only modest year-to-year shifts; for example, the top 0.001 percent paid about 44 percent in 1962, while in 2014 it had changed by only about three percentage points, to around 41 percent. Magness concurred with Fors that Saez’s and Zucman’s work contradicted decades of scholarly literature on how corporate tax incidence should be handled.
Fors also challenges Saez’s and Zucman’s assertion that the rich avoid income taxes with a “buy, borrow, die” strategy—leveraging debt against net worth to fund their lifestyles. “This approach isn’t limited to ultra-wealthy individuals; ordinary people can use it too,” he notes, and it only works if assets continue to rise. If asset values fall, lenders can demand repayment, and selling assets to meet obligations “can also trigger a substantial tax liability if there are large, unrealized capital gains.” There exist tax-reduction strategies, but they aren’t exclusive to the wealthiest and they come with their own risks.
Compelled to Sell or to Flee
Last month, in a discussion with Representative Ro Khanna (D–Calif.), entrepreneur Mark Cuban warned that the wealth tax could force founders with large paper values to sell stakes in their companies because “they are the definition of cash poor, stock rich.” Taking loans against company shares to cover tax bills, as Khanna suggested, would be a difficult proposition for founders of speculative startups.
As expected, relocating to tax-friendly jurisdictions remains one of the least risky ways to minimize exposure to high taxes. Fors observes that “even the exceedingly unlikely prospect of a wealth tax can trigger capital flight,” pointing to the visible departures of wealthy individuals who have moved substantial capital beyond California’s borders. “Wealth is notoriously mobile, making it very hard to tax.”
“Over the years, California has repeatedly embraced policies that push people and capital out of the state,” Fors concludes. “If enacted, the billionaire wealth tax—and the precedent it would set—could be the final straw that breaks the camel’s back.”
Californians appear ready to upend their state’s trajectory with this ill-conceived tax plan. Yet they also seem ready to back countermeasures that could block the tax from taking effect.
