The United States is about liberty and opportunity. Free-market capitalism bound to the rule of law is the foundation of the strongest economy in the world. But from time to time, left-wing politicians and academics forget what makes America great. Instead, they propose policies that would undermine the foundations of the economy and the freedom to pursue one’s dreams.
Just a few days ago, two prominent left-wing economists, Emmanuel Saez and Gabriel Zucman, wrote an opinion piece for the New York Times supporting a November state ballot measure that would introduce a “one-time” 5% wealth tax for California billionaires. Unfortunately, the economists fail to grasp a basic economic principle: Incentives matter. Wealth taxes would discourage hard work, innovation, and entrepreneurship, three pillars of the U.S. economy.
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The economists rail against the wealth of the billionaires who created Alphabet and Meta, companies that Americans value greatly. The economists argue that it is unfair that California’s billionaires pay only a small fraction of their wealth in taxes. But is it fair to punish success? To punish the ability of Americans to use Google Search to find immediate answers to difficult questions?
The clear answer is no. Punishing success is wrong.
Moreover, the economists never acknowledge that entrepreneurs keep only a small fraction, perhaps about 2%, of the economic value created by their innovations. The economists also fail to tell a basic truth about wealth taxes: They do not work. Such taxes are inefficient at raising revenue. They spur endless litigation over the valuation of assets such as art collections and private equity holdings. Most critically, wealth taxes would reduce investment, the critical input for economic growth. Moreover, how many billionaires or the best, most aspirational entrepreneurs will choose California for their residency if this measure is passed? They’ll know this is a one-time tax, just until it’s the next time.
Europe provides a cautionary tale. Over the past several decades, many European countries experimented with wealth taxes. Most eventually repealed them after discovering that the taxes generated less revenue than expected while driving away investment and high-income residents. France abandoned wealth taxes because the economic damage outweighed the financial benefits. California should learn from those mistakes rather than repeat them.
The state’s economic future depends on innovation, entrepreneurship, and investment. Artificial intelligence, semiconductor manufacturing, energy infrastructure, and biotechnology all require enormous amounts of private capital. Punishing wealth creation through higher taxation would make California less competitive, precisely at the moment global economic competition is intensifying.
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If California truly wants stronger public finances, rising living standards, and a more robust public healthcare system, the answer is not confiscatory taxation. The answer is faster economic growth, more business formation, lower energy costs, policies that encourage investment, and tackling the massive fraud embedded in California’s Medicaid system.
Wealth creation should be celebrated, not demonized.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for over 30 years. Today, he writes a daily note on markets, economics, politics, and social issues.