Billionaire wealth taxes are easily dodged by relocating. A more robust policy would tax capital gains based on the jurisdiction where the value was created, preventing billionaires from moving to a zero-tax state just before selling stock to avoid taxes.
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The wealth tax initiative is drafted to be highly punitive by including large Roth IRAs and negating the benefits of complex trust structures typically used for tax avoidance. This makes it extremely difficult for wealthy individuals to escape its reach if passed.
A controversial feature of the proposed California billionaire tax is its retroactive application. The tax would affect anyone who was a billionaire resident at the start of the year, even if the law passes months later. This legal mechanism is designed to stop wealthy individuals from moving their assets out of state before the vote occurs.
California is on the verge of a massive tax revenue surge from upcoming IPOs of companies like SpaceX and OpenAI. However, a proposed wealth tax on illiquid assets is causing tech leaders to relocate, potentially costing the state the very economic boom it needs to balance its budget.
Congressman Ro Khanna proposes a tax on the total net worth of individuals with over $100 million. Unlike an income or capital gains tax, this targets unrealized wealth, forcing the liquidation of assets like stocks to generate the cash needed to pay the tax.
Founder Aaron Galperin moved from high-tax California to no-tax Texas specifically to avoid state income tax on his company's sale. This pre-exit relocation is a crucial, often overlooked financial strategy that significantly increases a founder's net take-home pay from a liquidity event.
The wealthiest individuals don't have traditional paychecks. Instead, they hold appreciating assets like stock and take out loans against that wealth to fund their lifestyles. This avoids triggering capital gains or income taxes, a key reason proponents are pushing for a direct wealth tax in California to address this loophole.
Ben Horowitz warns against wealth taxes on unrealized gains by citing Norway's experience. The policy required founders to pay taxes on their private company's rising valuation with illiquid stock, leading to an exodus of entrepreneurs and effectively dismantling the local tech ecosystem.
Unlike a capital gains tax which is paid upon sale, Switzerland's wealth tax is levied annually regardless of performance. This prevents timing tax payments and its compounding effect can become more costly for long-term investors than a one-time capital gains tax.
The US tax system disproportionately penalizes high-income 'workhorses' (e.g., doctors, lawyers) who earn from labor. In contrast, the super-rich, who derive wealth from capital gains and have mobility, benefit from loopholes that result in dramatically lower effective tax rates.
Billionaire CEOs face a no-win situation where publicly opposing a wealth tax invites attacks from employees, shareholders, and media. The rational response is to remain silent while privately planning a move to a more favorable tax jurisdiction like Austin or Miami.