California’s Wealth Tax Meets the 2nd Law of Demand
"As Adam Smith said, there is a great deal of ruin in a nation. A wealth tax, temporary or permanent, will likely deepen California’s fiscal hole. Such a tax chases out current wealth creators and discourages future wealth creation. What is unseen from this tax is all the entrepreneurs who may choose to form businesses in Texas, Nevada, or elsewhere rather than California."
- "Proposition 40 is called a one-time tax, but the way it is funded and California’s tax history suggest it will last.
- People adapt to a tax over time, so a permanent wealth tax would bring in less revenue each year while its costs rise.
- Comparisons to Massachusetts’s millionaire surtax do not hold, because Proposition 40 taxes total wealth rather than income above a threshold.
- \The biggest cost is unseen: entrepreneurs who build their businesses in Texas, Nevada, or elsewhere instead of California.
California’s Proposition 40 would impose a wealth tax on the residents of the state, if passed. Despite being a one-time tax, its supporters hope that its passage will kick-start a wave of wealth tax measures across beyond just California. If these taxes become permanent, then their negative consequences will worsen over time while the benefits will shrink, for the simple reason that people will find new ways to avoid the tax. In economics, this passage of time effect is called the Second Law of Demand.
Colloquially called a “billionaire’s tax,” Proposition 40 would impose a one-time 5% tax on the net assets (gross assets minus debt) of people residing in California on January 1, 2026." . . .
Jon Murphyis a Research Fellow at the Independent Institute and Assistant Professor of Economics at Nicholls State University (Louisiana).
