Editor’s Note: Below, Chief Investment Strategist Alexander Green shares his biggest concern this Election Day: a California ballot measure with the potential to affect virtually every American.
However, Alex is best known as a “rational optimist” who focuses on technology, innovation, and human progress (and how to profit from all three).
For more from Alex, check out his article in yesterday’s Liberty Through Wealth: “The Low-Risk, No-Brainer Way to Play the AI Boom.”
– James Ogletree, Senior Managing Editor
Americans have long had an aversion to taxes. And it’s not hard to see why.
State and federal governments tax your income when you earn it, your purchases when you spend it, your interest when you save it, your dividends when they’re paid, your capital gains when they’re realized, and – if you handle your financial affairs successfully over your lifetime – they tax what’s left when you die.
Talk about thorough.
Yet California – which has the highest state income tax rates in the nation – isn’t done.
Today, it is conducting one of the most consequential tax experiments in American history.
Voters there will decide whether to impose a one-time 5% tax on the accumulated wealth of the state’s billionaires.
The proposal, Proposition 40, is the most significant item on the ballot anywhere in the country.
Bear in mind, a wealth tax isn’t a tax on what you earn. It’s a tax on what you own.
Your stocks, your bonds, your stake in a private business, your art collection. You pay whether your portfolio went up or down, and regardless of whether you sold anything.
You might assume all this is of no consequence to you. After all, you may not live in California. And, even if you do, your net worth is probably less than $1 billion.
Yet this vote has the potential to affect every investor – indeed, anyone who owns assets – in a big way.
The stakes are enormous because a principle is at stake. Does the state have the right to tax your assets just because they exist?
California isn’t entering uncharted territory. Wealth taxes have a long history, particularly in Europe.
That history offers important lessons about how much revenue these taxes generate, how taxpayers respond, and why most governments eventually abandon them.
The most striking fact is this: Of the 12 OECD countries that levied individual net wealth taxes in 1990, only three still have them today.
Why? Over time, most governments discovered the taxes create more problems than they solve.
First, wealth taxes generate less revenue than their headline rates suggest.
Second, they are expensive to administer. (Publicly traded shares are easy to value. Private businesses, intellectual property, art collections, and complex partnerships are not.)
Third, wealthy taxpayers can respond in ways ordinary taxpayers cannot. They can reorganize investments, shift business activity, and – not least of all – pack their suitcases and leave.
This is why California Governor Gavin Newsom is on record as opposing the wealth tax. (He would rather it were applied nationally so that citizens cannot escape it by leaving his state.)
Unsurprisingly, the billionaire exodus has already begun.
Seven billionaires have publicly moved out of California, removing approximately $540 billion of wealth from the potential tax base.
Among the reported departures are Google co-founders Larry Page and Sergey Brin, along with venture capitalist Peter Thiel.
(The world’s richest person, Elon Musk, vamoosed to Texas – along with his trillion-dollar companies – back in 2020.)
These departures have already eliminated nearly a third of the potential wealth-tax base.
And they raise an uncomfortable question: What happens to California’s finances – and who is left paying the bills – when the state permanently loses its most valuable income-tax payers?
Even if Proposition 40 ultimately fails, it has already cost the state billions in future tax revenue. (It turns out that just talking about a wealth tax costs a state money.)
The fiscal stakes are particularly high because California relies heavily on income taxes paid by a relatively small number of high earners.
A “one-time” – I’m tempted to laugh here – wealth tax might temporarily produce revenue. But the departure of wealthy taxpayers assuredly reduces future income-tax collections.
(To those who think the state’s richest citizens “don’t pay their fair share,” California is uniquely dependent on its wealthiest residents. The top 1% of earners typically pay approximately half of all state personal income tax revenue.)
When a billionaire moves to Miami, California doesn’t just lose a wealth-tax check. It loses decades of capital gains taxes, income taxes on stock sales, and the spending of everyone on his payroll.
Of course, even if California voters approve Proposition 40, it will not settle the matter.
Several constitutional questions must be answered before the state can even collect the tax.
For starters, the tax is retroactive to January 1, 2026. It proposes to tax people who may no longer be California residents.
There is also the question of whether it violates the U.S. Constitution. The Fifth Amendment prohibits the government from taking private property for public use without “just compensation.”
These likely legal battles introduce another financial uncertainty: California could spend years in litigation before collecting any revenue.
You might reasonably wonder what this has to do with your freedom and prosperity if you aren’t a California-based billionaire.
Let’s examine the history of U.S. tax collections…
When the modern federal income tax began in 1913, fewer than 1% of Americans paid it. The initial rate was only 1% – on incomes that exceeded $100,000 in today’s dollars – and the top marginal rate was just 7%.
Within five years, the bottom rate was 6% and the top rate was 77%.
The number of returns jumped from about 358,000 that first year to roughly 3.5 million in 1917 and over 5 million by 1920.
In other words, within five years the top rate went up elevenfold and the number of filers grew more than tenfold.
Today, roughly 160 million returns are filed each year.
A tax that promised to touch only the wealthiest 1% at a maximum 7% rate became, within five years, a 77% top rate. And within one generation, it became a tax on nearly every working American.
The same thing could happen with wealth taxes. First, they come for the billionaires. Then, the millionaires. Then, everyone else.
History shows that wealth taxes raise little, are expensive to administer, and drive away the most mobile and productive people in the economy.
It’s sad. California has given the world Silicon Valley, Hollywood, and some of the greatest innovations in human history. It got there by attracting builders, not chasing them away.
The premise behind the new tax is that private wealth constitutes an illegitimate diversion of resources away from the state.
This isn’t just wrong-headed. It’s scary.
Let’s hope the wealth-tax enthusiasts in California don’t get a foot in the door today.
The income tax started by exempting all but the richest members of society but soon snared almost everyone.
Would a wealth tax really be any different?