The Worst-Case California Wealth Tax Scenario Is That It 'Succeeds'

Government spending is the biggest, most economy-sapping tax of all. But we’ve gotten ahead of ourselves.

Backtracking, there’s a one-time wealth tax that Californians will vote on next month. The tax, if implemented, would collect 5 percent of the headline wealth of California’s many billionaires.

How unfortunate if Proposition 40 passes, and worse, if it has teeth. Since the rich can’t reasonably spend it all, their untaxed and unspent wealth quickly morphs into fuel for economic progress as financial intermediators match their abundant funds with the corporations and entrepreneurial concepts poised to invent the future by failing, doing well, and prospering thanks to the intrepid capital that the superrich uniquely possess. If government spending is the biggest tax of all, then by extension wealth taxes are the worst taxes of all.

Which requires one more backtrack. California already has a wealth tax. So does every city and state in the United States, and likely the world. If anyone doubts this, imagine if California had a flat tax of 1% on income, capital gains, and consumption. If so, its many billionaires would pay exponentially more in taxes than the other 99.9999999% in the state. It’s just a comment that assuming passage of Proposition 40, the latest “one-time tax” will be a wealth tax in addition to all the others.

All of this in mind, the left are positively bonkers for pursuing yet another tax on wealth. Yet their opponents are similarly bonkers for pretending that this tax will be what depopulates the state of California of its abundant talent. It’s unlikely when it's remembered that California has long excessively penalized its richest citizens.

Just the same, and assuming a mass exodus, to suggest this would prove “disastrous” for California implies that people in California don’t benefit from innovation outside California. To grasp the fatuity of just such a belief, just consider how very much the whole world is lifted by economic activity inside California as you’re reading this. As Steve Trost and I write in our upcoming book California Freedom, economic activity within California lifts the U.S. and global economy like no other city, state, or country, and the comparison isn't even close.

So, while all U.S. cities and states have wealth taxes, talent is talent. Assuming an exodus, watch the talent prosper elsewhere to the benefit of us all.

Which brings us to the more likely scenario whereby Proposition 40 “succeeds” in a tax collection sense. More taxation of wealth, and more tax revenue for Sacramento. It’s what the various policy ideologies (left, right, libertarian, supply side) never discuss given their monolithic aim to raise as much tax revenue as possible, albeit in different ways.

Stop and think about all the dysfunction this funds. There’s your crisis: governments that are expert at fleecing the rich through taxation can spend and borrow with ease, yet the warring ideologies focus on the debt that’s an effect of the collection while ignoring the real crisis that is the “successful” fleecing of the rich.

Which is again by design. The left are up front about wanting more taxes from the rich, but then so are supply siders, albeit through different tax collection schemes.

Yet wealth taxes are the source of the majority of our problems locally, in states, and nationally. Which is again the problem: wondrous as all the California wealth creation is for the Golden State, and the world, what if the next wealth tax “succeeds”? History says it will, and that's the crisis.

Originally published on Real Clear Markets.