Guest Essay by Joshua Rauh and Benjamin Jaros: The Wealth Tax Proposal

Joshua Rauh, the George P. Shultz senior fellow in economics at the Hoover Institution at Stanford University, and Benjamin Jaros, a research fellow at the institution, explore the implications of the 5 percent wealth tax proposal on California’s ballot this year. While at first glance, the tax might appear to be a sensible method for generating revenue mainly from billionaires, opposition arises from diverse political factions, including organizations like Planned Parenthood Affiliates of California, the California Teachers Association, and Governor Gavin Newsom, a Democrat. This resistance is based on substantive concerns.

The proposal involves taxing the accumulated assets of the ultra-wealthy in California. According to an analysis of the plan’s financial logic, this new net wealth tax would likely offer minimal benefits to the state’s funds while threatening the economic foundation of California. Historical precedents from other nations illustrate the pitfalls of this approach.

In 1990, 12 industrialized nations introduced wealth taxes. By 2025, nine had decided to abandon these taxes, including Denmark, Sweden, Germany, the Netherlands, and France. These countries encountered challenges in implementing the tax, saw affluent individuals relocating their finances elsewhere, and experienced disappointing revenue outcomes. Notably, France abolished its wealth tax in 2018 after it faced the departure of approximately 200 billion euros (around $228 billion) over two decades and confronted an annual budget deficit of 7 billion euros attributed to the tax.

Similar repercussions are anticipated for California, potentially on a heightened scale. Based on a study of 212 California billionaires impacted by the proposal, Rauh and Jaros estimate the tax might collect only $40 billion for the state, diverging sharply from the $100 billion projected by proponents. The Google co-founders Sergey Brin and Larry Page exemplify prominent billionaires who already vacated California prior to the cutoff date of December 31, 2025. Over 30 percent of the billionaire tax base left before the residency deadline, thus diminishing the potential revenue significantly.

Driving affluent residents from California would yield severe impacts. Each billionaire’s departure also diminishes income tax streams that might have expanded and perpetuated over time. Because moving out of a state presents fewer difficulties than emigration, California may witness an even more pronounced migration than what was observed in European nations.