I favor higher taxes on the ultra-wealthy. But I worry that California’s proposed tax on billionaires will inflict lasting damage on the economy and undermine the state’s status as a global home for innovation.
A growing body of economic research suggests that high taxes can make states less attractive to entrepreneurs. If California drives away some of the people who create companies and jobs, ordinary Californians will ultimately bear much of the cost in the form of fewer employment opportunities. The chief beneficiaries will be low-tax states such as Texas and Florida, which stand ready to absorb the jobs that California drives away.
California already has the most progressive state tax system in the nation. Its top marginal personal income tax rate is 13.3%, the highest of any state. Texas and Florida, by contrast, have no state personal income tax. This persistent difference puts California at a disadvantage in attracting and retaining high earners and the businesses they create. A new wealth tax would accelerate the outflow toward low-tax red states.
The empirical evidence supports these concerns. In joint research with Daniel Wilson of the Federal Reserve Bank of San Francisco, my colleagues and I followed the geographic mobility of billionaires on the Forbes 400 list over two decades. We found that billionaires are sensitive to taxes on their wealth. When a state enacts an estate tax — the closest real-world analogue to a wealth tax — 1 in 5 billionaires relocates to another state.
This dynamic is already unfolding in real time. Several of California’s most prominent technology entrepreneurs have already established primary residency elsewhere, well before November’s vote on Proposition 40, a.k.a. the billionaire tax. As California loses billionaires, its tax base shrinks. The state could end up collecting less revenue than the tax proponents anticipate.
The most consequential effect of the tax, however, isn’t on where today’s billionaires decide to live. It’s on where tomorrow’s billionaires choose to start their companies. California’s technology and biotechnology industries — among the principal engines of the state’s economic dynamism — were built by entrepreneurs who chose to establish their businesses here. Their decisions generated not only enormous private fortunes but also millions of jobs, investment and tax revenue. Making California less attractive to the next generation of entrepreneurs could therefore have grave consequences.
Consider the cost of failing to attract the next Sergey Brin and Larry Page, the co-founders of Google. Today, the company they created employs an estimated 85,000 people in California and distributes an estimated $32 billion a year in wages, benefits and stock compensation to its employees in the state. Those employees are estimated to pay $2.3 billion annually in California taxes, while the company itself pays an additional $1.3 billion in estimated corporate taxes.
If California were to lose even a small number of future companies of comparable size because their founders chose Austin or Miami rather than Silicon Valley, the resulting loss of jobs and tax revenue could easily outweigh the revenue generated by the proposed tax.
Consequences would extend well beyond the technology sector. High-tech jobs create demand for workers throughout the local economy. When technology employment expands, so does demand for housing, restaurants, retail, healthcare, education and a wide range of professional and personal services. When technology jobs disappear, some of that demand disappears with them. The people affected if jobs were lost would therefore not be limited to software engineers. They would include construction workers, real estate agents, restaurant employees, nurses, teachers, retail workers and countless others whose livelihoods depend, directly or indirectly, on the economic activity generated by a thriving technology sector.
It is not surprising that the “No on 40” coalition includes teachers, doctors, front-line healthcare workers and first responders. They understand that California’s tax policy affects far more than billionaires. It affects the jobs of ordinary workers.
The wealthiest Americans can and should contribute more to financing public services. But if we want to increase taxes on billionaires, the federal government is the appropriate place to do it. It is far harder for a taxpayer to move from the United States to another country than to move from California to another state.
A tax adopted by California alone would weaken the nation’s most progressive state while strengthening precisely the red states that compete against it for talent, capital and jobs. The question is not whether billionaires should pay more. It is whether California should adopt a tax that encourages them to build their next company somewhere else.
Enrico Moretti is a professor of economics at UC Berkeley.
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