Why the Billionaire Wealth Tax Is Not the Right Answer for California’s Fiscal Problems
We just published a research paper analyzing California’s proposed Billionaire Tax. While other research has focused on arguments about how much revenue the tax would raise, this new paper concentrates most of its attention on the economic effects of the tax on the California and U.S. economies—specifically, whether a wealth tax on California’s billionaires threatens the unique business environment of California and its status as a technology hub.
The study also evaluates the claim that the proposed one-time wealth tax on billionaires would be a major step toward solving California’s fiscal problems. We show that, as proposed, a one-time tax would not solve the state’s structural fiscal problems even if it managed to raise significant revenues. That matters because (a) it suggests that California may need to resort to additional wealth taxation in the future, and (b) it implies that California residents and businesses will anticipate those additional taxes to come.
The new tax would have adverse consequences on investment and growth, would encourage the ongoing population decline, and would lead to likely losses of “agglomeration economies” associated with locations that employ many high-tech laborers.
Building on the existing knowledge about the effects of taxes in the public finance literature, our study provides some simple simulations describing the broader economic effects associated with perceptions of a higher risk of future wealth taxes if the Billionaire Tax Act becomes law. The simulations focus on three scenarios that differ according to the assumed reliance on wealth taxation necessary to address the state’s fiscal problems. The implied adverse consequences for growth and leadership in technology are potentially large for California, and possibly consequential for the U.S. as a whole. Under the alternative scenarios, the study finds that the wealth tax would lower the level of employment in California’s high-tech sector at the five-year horizon by about 1 or 2 percent relative to what it would be in the absence of the wealth tax. Spillover effects from the high-tech sector would depress employment in other sectors as well.
To gain further insight into the effects of wealth taxes on avoidance, out-migration and economic growth, the study also performs two historical reviews. First, it summarizes tax policy changes in California in recent decades, showing the growing arithmetic challenge from continuing to impose new taxes on a narrow segment of the population. Second, it considers the record of the outcomes of wealth taxation in other countries. Other countries that have imposed wealth taxes find substantial effects on migration and growth, which often leads them to abandon or modify the taxes in light of that adverse experience. That is true even though almost all of those wealth tax experiments imposed wealth taxes much lower than the proposed 5 percent California rate.
The study concludes that there are no easy solutions to California’s fiscal problems. In the end, the budget arithmetic will compel the state to implement some combination of expenditure cuts and revenue raising measures of the type considered by the California Legislative Analysts’ Office. It seems likely that a combined approach along these lines will be a more fiscally effective and less economically damaging solution to California’s fiscal problems than the proposed Billionaire Tax.
