Taxing billionaires
California’s billionaires are in revolt.
In response to a proposed one-time 5 percent tax on California’s wealthiest residents, Google’s founders, Sergey Brin and Larry Page, moved assets out of the state. The venture capitalist David Sacks opened an office in Texas. Peter Thiel, who founded PayPal with Elon Musk, donated $3 million to a campaign against the proposal, which supporters are trying to put on the ballot in November.
California’s governor, Gavin Newsom, a Democrat, has vowed to fight the wealth tax, warning that it would stifle innovation. But Californians aren’t the only ones arguing about whether the ultrarich need to pay more.
The number of billionaires has exploded, and so has their wealth: In 1987, Forbes magazine counted just 140 billionaires around the world. Last year, over 3,000 people made the list. Elon Musk alone is worth some $700 billion — not far off the collective fortune of the entire class of 1987, after adjusting for inflation.
Yet they pay taxes at rates well below those of typical taxpayers, for reasons I’ll explain below.
There is broad public support for taxing wealth. Governments need money, the rich are richer than ever and, at a time of stark inequality, the idea of raising more revenue from the ultrawealthy is morally and politically appealing to many.
But is it effective?
A bad track record
A wealth tax targets assets rather than income.
Income taxes don’t work well for the very rich. Most of their wealth is in stock and other assets, which they can structure in ways that generate very little taxable income.
The effective tax rate on the 400 wealthiest Americans, for example, stood at 23.8 percent in the years from 2018 to 2020, compared with 30 percent for the average taxpayer. That’s why some governments have tried to tax wealth more directly.
In the decades after World War II, many Western European countries taxed households’ net wealth. But most wealth taxes have since been scrapped. They are costly to administer: Unlike income, wealth can be hard to measure. How do you value a Picasso or a stake in a family-owned business? And they raise comparatively little revenue. Not so much because a lot of rich people have fled — capital flight is a relatively muted phenomenon, studies show — but because they’ve mostly managed to avoid paying the tax, thanks to a series of exemptions.
Critics of recent wealth tax proposals point to this history as a reason to avoid going down that path again. But advocates say the design flaws of the past can be addressed. And they point out that today’s extreme concentration of wealth has its own economic and political costs.
Simple taxes for the superrich
I spoke to Gabriel Zucman, the economist behind a hotly debated French wealth tax proposal.
He told me that the way to address the failings of past wealth taxes is to keep it simple — a flat-rate tax focused narrowly on the superrich. California is targeting only billionaires, of whom there are about 200 in the state. That lowers the administrative lift. It also largely solves the valuation problem: Most of their wealth is in shares of publicly traded companies, not yachts or artwork.
The biggest challenge is avoiding capital flight. The ultrarich are also ultramobile. That problem was historically overstated, but a system without exemptions would increase the incentive for the wealthy to flee in the face of new wealth taxes. One way to address that is an exit tax, which collects money from those who leave.
America already has an exit tax: U.S. citizens pay taxes wherever they are, and if they renounce their citizenship, they have to pay tax on all unrealized capital gains. Even Gavin Newsom says he might feel differently about a federal wealth tax that removes the incentive to leave California.
Those who remain skeptical argue that there are other ways to achieve similar goals. Raising the inheritance tax for the ultrawealthy and making capital gains subject to regular income tax could raise revenue and address inequality.
Where there has been some convergence recently is around the idea that inequality does need addressing.
“Extreme wealth compromises democracy,” said Kenneth Rogoff, former chief economist of the International Monetary Fund. “The rich pay very little tax. And they have incredible influence over the political system, and that’s why it’s hard to fix.”
The World Economic Forum just released a survey of its participants, who deemed inequality a major risk. It fuels “other global risks as the social contract between citizens and government falters,” the report says.
There is at least one billionaire who is attending Davos who has said he’s happy to pay the California wealth tax: Jensen Huang, the chief executive of Nvidia, the world’s most valuable company. “We chose to live in Silicon Valley,” he said recently. “Whatever taxes they would like to apply, so be it.”
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Here are today’s Spelling Bee, Mini Crossword, Wordle and Sudoku. Find all our games here.
You’re done for today. See you tomorrow! — Katrin
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Katrin Bennhold is the host of The World, the flagship global newsletter of The New York Times.
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