How to tax the (really) rich

Proposition 40 is a one-time 5% tax on billionaire cumulative wealth, with most proceeds going to healthcare to offset federal cutbacks. The measure has split the Democratic coalition, with Governor Gavin Newsom, major labor unions, and tech billionaires opposing it, while SEIU United Healthcare Workers West, Senator Bernie Sanders, and Congressman Ro Khanna support it.

The state's nonpartisan fiscal analyst validates that the tax will produce a one-time windfall but drive enough people out of state to ultimately mean less money for California. Billionaires like Sergey Brin, Larry Page, Peter Thiel, David Sachs, and Larry Ellison have confirmed or are leaving California.

Billionaires led by Sergey Brin are pouring tens of millions into stopping the wealth tax and qualifying rival ballot initiatives designed to invalidate it. The tax has accelerated efforts to get more tech allies into the state legislature to counter organized labor's power and California's leftward shift.

Credible polling puts the wealth tax in the low 50s, a tenuous majority before a $100 million opposition ad campaign kicks off. Proponents are channeling national backlash to Donald Trump's tax bill and voter frustration with an economy distorted to benefit the ultra-rich.

If California balks at taxing billionaires, it shows the policy is harder to achieve than expected and doesn't bode well for federal efforts. Despite Democratic supermajorities, passing taxes in California is not easy.

Proposition 40 fails to raise net revenue because billionaire avoidance and out-migration will shrink the tax base and cost ongoing income tax revenue. Wealth taxes generally score poorly in public economics because they discourage investment, reduce job creation, and force founders to withdraw capital from businesses.

The tax system has a fundamental loophole where unrealized capital gains go untaxed, allowing vast fortunes to accumulate without tax liability. Research on state-level millionaire income taxes shows they raise significant revenue with little to no tax-induced migration. California's proposed one-time billionaire tax is an unprecedented instrument with much larger bills than previous state tax policies studied.

A federal billionaire income tax should tax year-to-year increments in billionaire fortunes as income, rather than a one-time wealth tax on total assets. Borrowing against appreciated stock doesn't trigger tax liability, so treating unrealized gains as income ensures billionaires pay taxes on annual wealth growth.