When government grows to dominate ever-larger shares of the economy and when politicians refuse to be responsible about what they spend, there’s a predictable next move: insist that the problem is “the rich” not paying enough. Never mind that high earners already shoulder a disproportionate share of the tax burden. Never mind that relying on a small and mobile group of people for the bulk of your revenue makes public finances more volatile, not more stable.
No, once spending is treated as untouchable and restraint as politically impossible, it’s only a matter of time before politics demands more, more, more. More taxes and more distortion. This helps explain why the wild new forms of wealth taxes are popping up.
California voters are heading toward a November ballot fight over the so-called “one-time” 5% tax on billionaires’ net worth, tied to residency on a date that’s already passed. Illinois lawmakers recently flirted with a tax on unrealized gains — think of stocks yet to be sold at fluctuating prices that only exist on paper — before retreating. New York City Mayor Zohran Mamdani wants a wealth tax to help close the city’s roughly $12-billion budget gap. And prominent progressive Democrats have explicitly endorsed national wealth taxes (e.g., proposals from Sen. Elizabeth Warren).
Different places, same impulse: Avoid hard fiscal decisions by squeezing a narrow group harder.
A wealth tax is not like the income or consumption taxes we’re used to. In theory, it’s a cut of a person’s entire stock of assets (less their liabilities). In its classic form, a wealth tax is assessed annually. Newer examples in the U.S. appear as one-time levies or use a “mark-to-market” system to tax unrealized gains, treating appreciation as income. However it’s packaged, the economic logic is the same.
Wealth taxes are also a uniquely blunt and damaging instrument. Across advanced economies, they have repeatedly been narrowed or even repealed after delivering disappointing revenue, tax avoidance, capital flight and costly administrative battles. The international record is decisively negative no matter what convoluted arguments their supporters want to use in America.
Start with the claim that “the rich have the money to pay it.” Most large fortunes are not sitting in piles of idle cash. They are ownership stakes in operating businesses and other productive investments already taxed through income, capital gains and corporate taxes. Wealth taxes layer in additional levies, which, among other things, function like highly confiscatory effective tax rates on normal investment returns. This is especially true in low-growth environments and when stacked on top of already high federal, state and local taxes.
Therefore, claims that wealth taxes “only hit billionaires” don’t hold water, either. That’s not how economics works. Reducing returns on saving and investment means that, over time, the wealthy invest less — and we need them to invest. The harm, including slower productivity and wage growth, may be spread out in myriad ways across the economy. But it is real.
In other words, a policy that makes it more expensive to build, scale and keep businesses in a jurisdiction does not stop with the people writing the checks. Rich people and their money are mobile. Workers are not, and they ultimately pay a high price through fewer opportunities and lower pay.
Then there are the claims that taxes like the one proposed in California are a “one-time” thing. This misleading framing solves nothing.
A tax hinging on residency at a particular moment creates a coordination problem for the state by encouraging the wealthy to leave — perhaps permanently — and business decisions to be made based on tax strategy rather than consumer needs. In a system already dependent on a small number of taxpayers, losing even a handful can wipe out projected revenue.
The effect is magnified because billionaire wealth is often illiquid. Paying the tax typically requires selling assets or borrowing against them, triggering capital gains taxes, leverage risks and further distortions. It helps explain why some high-net-worth individuals have already left states like California while others openly posture to exit if these proposals pass.
What comes next is predictable. When wealth-tax revenue falls short — and it will — policymakers will expand the taxes rather than cut spending. A “one-time” levy applied to billionaires or millionaires makes its way to far lower net worths. Rates rise. What begins as a narrow, exceptional measure becomes more permanent for more people, justified at each step by the same fiscal desperation that produced a proven failure of a policy in the first place.
Only then will the taxman relent. Europe’s wealth taxes proved long-term failures and only a handful remain. Californians, consider yourselves warned.
Wealth taxes are not a solution to a broken fiscal culture; they’re a symptom that treats spending growth as inevitable and responsibility as optional. Policymakers who call for more durable finances and real upward mobility can fecklessly blame the rich or do the real, hard work: control spending growth, broaden tax bases and foster stable, pro-investment environments.
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. This article was produced in collaboration with Creators Syndicate.
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