The Window That Keeps Breaking
In a recent article, we examined Public Choice Theory and asked a question that most policy analysis avoids. If the invisible costs of bad policy are so large, and so reliably larger than the visible benefits - why do bad policies keep winning?
The answer, as James Buchanan showed, is that the political system systematically favors policies with concentrated benefits and diffuse costs. A policy that helps an organized, vocal group at the expense of millions of dispersed, quiet individuals will keep winning, even when the evidence against it accumulates to the point of being undeniable.
We tested this against five policy areas on this site - tariffs, regulation, wealth taxes, credit caps, and the incentives that produce each. In every case, the pattern held.
Today, we put Public Choice Theory to its most direct test yet. California’s Proposition 40, a one-time 5 percent wealth tax on billionaires, which will appear on the November 2026 ballot. The campaign is already underway. The arguments are being made. And if the global track record of wealth taxes tells us anything, we already know how this ends.
The question is whether anyone will be watching when it does.
Explaining Proposition 40 Fairly
Let us begin by stating the case for Proposition 40 in its strongest form, because the proponents deserve that much.
California faces genuine problems. The state has the highest poverty rate in the country when adjusted for cost of living. Housing is unaffordable for millions. Homelessness is visible in every major city. The gap between the tech-enabled wealthy and everyone else has grown so wide that it is argued that it has become a political crisis.
Proposition 40 proposes a simple fix. A one-time 5 percent tax on California residents with a net worth exceeding $1 billion. That threshold captures roughly 200 people – the state’s billionaires. The Legislative Analyst’s Office estimates it could raise between $20 billion and $50 billion in one-time revenue, earmarked for housing programs and climate projects.
On paper, it is an elegant political proposition. Tax 200 of the richest people in the state, once, to fund programs that help everyone else. Who could oppose that?
The answer, as the next several sections will show, is that the question itself is wrong. The relevant question is not whether billionaires can afford to pay. It is whether the tax will collect what its proponents project, and what will happen to the economy in the process.
These are questions the proponents have not answered well. And the global evidence suggests the answers are worse than they want you to believe.
The Track Record: Where Wealth Taxes Have Been Tried and Failed
Wealth taxes are not a new idea. More than a dozen OECD countries have tried them. Almost none have succeeded in the way their proponents promised. Let us walk through the evidence, drawing on articles already on this site.
France and the ISF. In “The Wealth Tax Video That Got Everything Right (Until It Didn’t), we examined the Impot de Solidarite sur la Fortune, France’s broad-based annual wealth tax that ran from 1982 to 2017. The ISF applied to households with net worth over roughly 1.3 million euros – far lower than California’s billion-dollar threshold, and therefore affecting far more people.
The results were catastrophic. Capital flight since the ISF’s inception is estimated at 200 billion euros. The French tax authority itself calculated that the annual economic cost of the tax – in lost investment, reduced economic activity, and avoidance – was roughly 7 billion euros, or about double what the tax actually raised. For every euro the ISF brought in, it cost the French economy two.
The tax was finally abolished in 2018 and replaced with the IFI, which applies only to real estate. The logic was explicit: real estate cannot be moved to Belgium. A wealth tax on mobile assets had proven unworkable, so the government limited it to the one asset class that cannot flee. That, of course, has it’s own problems.
Sweden’s experiment. In “California’s Wealth Tax," we documented Sweden’s experience with one of the most aggressive wealth taxes in the developed world. Introduced in 1947, it drove a massive exodus of entrepreneurs and business owners. Revenue peaked in the 1970s and then declined steadily, even as the wealth of the country’s richest citizens grew. The tax rate went up while the tax base went down. Sweden abolished its wealth tax in 2007.
Research by economists at the Research Institute of Industrial Economics found that Sweden’s wealth tax base eroded steadily as the wealthy either left the country or shifted their assets into forms that were harder to tax. By the time of repeal, the tax was raising almost no revenue while doing significant economic damage.
Switzerland’s counterexample. Switzerland is often cited as proof that wealth taxes can work. It has one. But the Swiss model is different in ways that matter. Swiss wealth taxes apply at much lower thresholds and lower rates, and they operate in a country where leaving is harder – restrictive citizenship rules, language barriers, and a quality of life that makes people want to stay. California has none of those protections.
A 2024 Cato Institute analysis of wealth tax proposals found that realistic projections of behavioral responses reduce expected revenue by 50 to 80 percent compared to static estimates. California’s projected $20 billion is probably more like $4 billion to $10 billion – and that is before enforcement costs.
The pattern across all these cases is the same. Wealth taxes fail because the thing being taxed is mobile, hard to value, and easy to avoid. The people being taxed have both the means and the incentive to restructure their affairs, and they are better positioned to do so than the government is to stop them.
What Public Choice Theory Predicts
This is where Public Choice Theory makes its entrance. The global track record of wealth taxes is not a collection of random failures. It is a predictable outcome of the incentive structure that produces wealth tax proposals in the first place.
Consider the political calculus. A wealth tax proposal offers an immediate, visible benefit to the politician who proposes it. The press conference is powerful. The headlines write themselves. The base is energized. The opponent is put on the defensive. The concentrated benefit – the political payoff – is large and immediate.
The costs, by contrast, are diffuse and invisible. The jobs that are never created because capital left the state. The startups that moved to Texas instead of Palo Alto. The tax revenue from the billionaires who would have stayed – income tax, capital gains tax, sales tax, property tax – that quietly disappears. None of these show up in a press release. None of them have an organized constituency to defend them.
The rational politician, facing these incentives, proposes the wealth tax. Not because it will work, but because it is politically rewarding to propose it. And when it fails, the response is never “that was a bad idea.” It is always “we did not go far enough.”
This is Buchanan’s insight applied directly. The system selects for policies that look good in isolation, regardless of their total effect. The wealth tax is a perfect example. Every country that has tried one has found that the costs exceed the benefits. Yet the proposals keep coming, because the political incentives that produce them have not changed.
The UK Wealth Tax Debate: A Case Study in the Same Pattern
The same dynamic is now visible in the United Kingdom.
In May 2026, a leadership crisis around Prime Minister Keir Starmer reignited the UK wealth tax debate. The left of the Labour Party, sensing an opening, began pushing for a 2 percent annual wealth tax on households with over 100 million pounds in net worth. The proposal would affect fewer than 1,000 of the richest UK households and, its advocates claim, raise roughly 10 billion pounds per year.
The parallels to California’s Proposition 40 are striking. Same threshold talk. Same targeting of a tiny fraction of the population. Same assumptions about the immobility of the tax base.
The UK’s new Prime Minister, Andy Burnham, has signaled openness to wealth tax proposals and received public support from a group of 120 millionaires who urged him to tax them more. Gary Lineker was among them. The political momentum is real.
But the evidence has not changed. The Institute for Fiscal Studies has called an annual wealth tax a “poor substitute” for properly taxing the sources and uses of wealth. The IFS further noted that such a tax could raise significant revenue only if it applied to the bulk of the UK’s wealth – including the homes and pensions of the middle class. Trying to raise large amounts from only the very wealthy would make the UK “a less attractive place for those people to live.”
A June 2026 Bloomberg analysis reached a similar conclusion: wealth tax proposals risk raising little extra revenue while hitting economic growth. The same studies, the same data, the same conclusions – and yet the political momentum persists.
The Public Choice lens makes sense of this contradiction. The political payoff of promising to tax the ultra-wealthy is immediate. The costs – reduced investment, capital flight, slower growth – are delayed and diffuse. The politician who proposes a wealth tax gets the headlines today. The successors who deal with the consequences get the blame tomorrow. That is not a conspiracy. It is business as usual in politics.
The November Test
California’s Proposition 40 is not just another ballot measure. It is the most direct test of Public Choice Theory’s predictions about wealth taxes that the United States has ever seen.
The state already has evidence that high taxes drive people out. In “California’s Wealth Tax," we documented that IRS migration data shows California lost 24,670 affluent taxpayers – those earning over $200,000 – in a single year, reducing the state’s adjusted gross income by $16.1 billion. Over the 2020 to 2022 period, more than $102 billion in income left the state. The Legislative Analyst’s Office estimates that this outmigration reduced income tax revenue growth by nearly $1 billion in 2023-24 alone.
Proposition 40 would add a 5 percent wealth tax on top of the income taxes that are already driving people out. A billionaire who might tolerate a 13.3 percent top income tax rate may not tolerate an additional 5 percent tax on assets that have not been sold and may never produce cash.
In “The Usefulness of Billionaires," we examined what concentrated private wealth actually does in an economy. It funds the high-risk, long-time-horizon investments that governments cannot replicate. The venture capital numbers tell the story: US venture capital investment in 2024 was roughly $170 billion. All of Europe combined was around $45 billion. The gap is not a coincidence. It is the direct result of concentrated private wealth choosing where to place its bets.
A wealth tax that drives billionaires out of California does not just lose the tax revenue from those individuals. It loses the capital they would have invested in the next generation of companies. The jobs those companies would have created. The tax revenue those jobs would have generated. The cascade is invisible but it is real, and it is the hidden cost that the proponents never account for.
November will tell us whether California learns the lesson that France, Sweden, and a dozen other jurisdictions have already learned. If Proposition 40 passes and delivers a fraction of the projected revenue, the proponents will declare victory. The capital flight will take years to materialize. By the time the cost is clear, the politicians who proposed the tax will have moved on to higher office or retirement.
That is what Public Choice Theory predicts. The concentrated beneficiaries of bad policy claim their reward today. The diffuse costs arrive tomorrow. And tomorrow never seems to arrive until it is too late.
The Better Question
The wealth tax debate, in California and in the UK, is asking the wrong question. The question is not whether billionaires can afford to pay more. It is whether the proposed tax will collect what its advocates promise, and what the second-order effects will be on the people who are not billionaires but whose livelihoods depend on the capital that billionaires control.
The global evidence is clear. Wealth taxes fail. They fail because the tax base is mobile. They fail because valuation is expensive and contentious. They fail because the behavioral response - avoidance, evasion, emigration - is larger than forecasters anticipate. And they fail because the political incentives that produce them reward the proposal, not the outcome.
California is about to run the experiment again. If the results match the pattern - and there is every reason to suppose they will - the question will be whether anyone is willing to draw the conclusion that the evidence demands. Not that the tax should be higher, or lower, or redesigned. But that the entire approach is structurally unsound, and the reasons it keeps getting proposed are political, not economic.
Next time someone tells you a wealth tax will fund popular programs and only hit the ultra-rich, ask one question: if every country that has tried this has abandoned it, what makes yours different?
The answer will tell you everything you need to know about whether they have done their homework.
This is the second in a series on Public Choice Theory. Start here: Public Choice Theory: Why Government Doesn’t Fix What Government Breaks →