The November Gamble
This November, Californians will vote on Proposition 40 - a one-time 5 percent wealth tax on residents worth over $1 billion. The pitch is simple: the rich have too much, so take some of it. The reality is more complicated, and the history of wealth taxes suggests California is about to learn a lesson that France, Sweden, and a dozen other places already learned the hard way.
The proposition would apply to about 200 people - Californians with net worth exceeding $1 billion. It projects raising somewhere in the neighborhood of $20 billion, earmarked for housing and climate programs. On paper, it sounds like an easy choice. Who wouldn’t tax 200 ultra-rich people to fund popular programs?
The answer, unfortunately, is that the 200 people in question have options the proposition’s authors didn’t account for. And those options have a way of making wealth taxes fail in predictable ways.
The Revenue Mirage
The first problem with any wealth tax is that it taxes something that is hard to measure and easy to move.
Income is relatively straightforward. You earned it, the IRS knows about it (if you did it legally), and the tax is due. But wealth is different. A billionaire’s net worth is mostly unrealized gains - stock in companies they founded, private equity stakes, real estate holdings, art collections. None of it is cash. None of it has a clear market price until it is sold.
How do you value a founder’s stake in a private company? How about a collection of rare paintings? The IRS and the state of California would need armies of appraisers, and every valuation would be disputed. The Compliance costs alone would eat up a significant chunk of the revenue.
The Tax Foundation estimates that wealth taxes in other countries have consistently raised far less than projected. In France, the wealth tax (Impôt de Solidarité sur la Fortune, or ISF) raised about €2.6 billion per year at its peak - but the compliance and enforcement costs were so high that the net revenue was significantly lower. More importantly, the ISF was a major factor in thousands of wealthy taxpayers leaving France each year.
Switzerland’s wealth tax, often cited as a counterexample, is different in ways that matter. It applies at much lower thresholds, with lower rates, and in a country where leaving is harder (restrictive citizenship rules, language barriers, and a high quality of life that makes people want to stay). California has none of those protections.
The Mobility Problem
A 2025 NBER study found that high-net-worth individuals are significantly more mobile than the general population. They have second homes in other states. They have business interests that can be operated from anywhere. They have access to lawyers and accountants who specialize in residency planning.
When California’s Proposition 40 was first proposed, venture capitalist Chamath Palihapitiya published a takedown arguing that the tax would hurt the next generation of Silicon Valley entrepreneurs far more than the entrenched billionaires. His reasoning is worth taking seriously.
The established billionaires - the Zuckerbergs, the Pages, the Brins - already have the legal infrastructure to restructure their holdings, change their residency, and minimize their exposure. They can afford the best tax lawyers in the country. The pre-IPO startup founder who just hit a $1 billion valuation on paper? They are stuck. They cannot easily move. Their company is here. Their investors are here. Their team is here. They are the ones who will actually pay.
This is the crux of the problem. A wealth tax that sounds like it targets Larry Page ends up hurting the next Larry Page - the person who has not yet built the fortune, whose wealth is tied up in a single company that would be crippled if the founder had to sell to pay taxes.
The Sweden Experiment
Sweden had one of the most aggressive wealth taxes in the developed world for decades. It was introduced in 1947 and applied to a broad base of assets at rates that increased over time. The results are instructive.
Research by economists at the Research Institute of Industrial Economics (IFN) found that Sweden’s wealth tax drove a massive exodus of entrepreneurs and business owners. The 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 Sweden repealed its wealth tax in 2007, it was raising almost no revenue while doing significant economic damage.
In fact, the revenue from Sweden’s wealth tax peaked in the 1970s and declined steadily after that, even as the Wealth of the country’s richest citizens grew. The tax rate went up while the tax base went down. That is not a bug. It is a feature of wealth taxes. The people being taxed have both the means and the incentive to avoid the tax, and they are better positioned than the government to do so.
A 2020 study by economists at the University of California found similar patterns in other European countries: wealth taxes consistently failed to raise the projected revenue because the behavioral response - avoidance, evasion, and emigration - was larger than forecasters anticipated.
The France Example
France’s ISF, which ran from 1988 to 2017, is another cautionary tale. The tax was structured to fall on households with net worth over €1.3 million - far below California’s billionaire threshold, and therefore affecting far more people.
French government data shows that during the ISF’s existence, France experienced a steady outflow of high-net-worth individuals to Belgium, Switzerland, the UK, and other countries without wealth taxes. The cumulative loss of tax revenue from the people who left - including the income tax, capital gains tax, and VAT they would have paid had they stayed - almost certainly exceeded the revenue the ISF collected.
President Macron’s government repealed the ISF in 2017 as part of a broader economic reform package. The stated rationale was straightforward: the tax was driving away the people who create jobs and pay other taxes. In the years since, France has seen a modest reversal of the outflow, though the long-term effects are still being studied.
The parallels to California are striking. Like France, California has high income taxes, a large budget, and a concentration of wealthy residents who are mobile enough to leave. Like France’s ISF, Proposition 40 targets a fraction of the population but creates incentives that affect everyone in the economic ecosystem around them - the employees of their companies, the suppliers, the communities that depend on their presence.
The California Exodus That Is Already Happening
The state does not need to wait for Proposition 40 to see what happens when high earners decide the tax climate is not worth it. It is happening already.
IRS migration data shows that California lost 24,670 affluent taxpayers - those earning over $200,000 - in a single year (2022-2023), reducing the state’s adjusted gross income by $16.1 billion. Over the 2020-2022 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.
The destinations tell the story. Florida gained 29,771 affluent taxpayers in the same period. Texas gained tens of thousands more. Even Oklahoma has seen an influx of Californians - as my ex-wife can attest.
These are people leaving under the current tax regime. Proposition 40 would add a 5 percent wealth tax on top of the income taxes that are already driving people out. The behavioral response to a wealth tax is larger than the response to an income tax, because wealth taxes are harder to comply with and easier to avoid. 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.
The question the proposition’s authors never answer: if Californians are already leaving under current tax rates, why would higher taxes make them stay?
The Pre-IPO Problem
The most overlooked consequence of Proposition 40 may be its effect on California’s startup ecosystem.
A wealth tax on paper billionaires - founders whose equity is valued at over $1 billion in a funding round - creates a liquidity problem. The founder has a high net worth on paper but no cash. They own a percentage of a company that investors have valued at billions. But that value is not liquid. You cannot sell a fraction of your private company stock to pay a tax bill without the other shareholders agreeing, the board approving, and the market absorbing the sale.
This is not hypothetical. The New York Times reported that several prominent Silicon Valley investors have already begun restructuring their holdings and exploring residency changes in anticipation of the Proposition 40 vote. The fear is not that they will pay the tax. It is that they will leave before the tax takes effect, taking their companies, their jobs, and their future tax payments with them.
Chamath Palihapitiya made this exact point in his July 15 post: the ultra-wealthy at the top can avoid the tax, but the up-and-coming entrepreneurs will be caught in between. The tax does not just target the wealthy. It targets the next generation of wealth creation. It taxes the thing California needs most - new companies, new jobs, new tax revenue - and makes it harder for the people building those things to stay.
What the Proponents Miss
The case for Proposition 40 rests on three assumptions, each of which is weaker than it appears.
Assumption 1: Billionaires will stay and pay. The evidence from France, Sweden, and every other jurisdiction that has tried a wealth tax suggests otherwise. Wealthy individuals are mobile. They have options. Many of them will use those options. The revenue projection assumes a static tax base that does not shrink in response to the tax itself - an assumption that contradicts decades of evidence.
A 2024 Cato Institute analysis of wealth tax proposals found that realistic projections of behavioral responses reduce expected revenue by 50-80 percent compared to static estimates. In other words, California’s projected $20 billion is probably more like $4-10 billion - and that is before enforcement costs.
Assumption 2: The wealth is there for the taking. The $1 billion threshold sounds like it captures only the very richest. But the threshold is based on net worth, not liquid assets. A startup founder whose company has a $2 billion valuation in its most recent funding round is now worth $1 billion - on paper. If they cannot easily sell their stake, they must either borrow against it or give up control. Either way, the tax distorts their decisions in ways that benefit no one.
Assumption 3: The money will go to good causes. Even if the tax raised the full projected amount, the track record of California’s government spending does not inspire confidence. The state has the highest poverty rate in the country when adjusted for cost of living, despite having the largest budget. The Public Policy Institute of California reports that over 16 percent of Californians live in poverty - more than any other state. Throwing more money at the same system that produced these results is unlikely to fix them.
The Better Question
The wealth tax debate, like most economic debates, is asking the wrong question. The question is not whether billionaires have too much money. The question is whether the rules we have make it harder or easier for ordinary people to improve their lives.
California’s housing crisis is not caused by a shortage of tax revenue. It is caused by zoning laws, environmental reviews, and permitting processes that make it nearly impossible to build enough housing. Proposition 40’s housing funding does nothing to fix those laws. It just throws more money at a broken system.
California’s poverty rate is not caused by a shortage of government programs. It is caused by a high cost of living driven by the same regulatory barriers, plus a tax code that punishes work and investment. Making the tax code more punitive does not help the poor. It hurts the people who would otherwise build the businesses that employ them.
The next time you hear someone say “tax the rich,” ask yourself: who can move, who can pass the cost on, and who gets stuck in the middle? The answers to those questions will tell you everything you need to know about whether the tax will actually work.
California is about to run a real-time experiment on Proposition 40. If the history of wealth taxes is any guide, the results will not be pretty. The question is whether anyone will be paying attention when the billionaires - and the billionaires-in-the-making - quietly leave.
Previously: Why You Shouldn’t Care About Billionaires →