Flawed Research and Real Economic Damage

Contents

I. Overview

Proposition 40, which would tax billionaires’ wealth in California, is based on faulty research and would have devastating economic consequences. Billionaires’ wealth creates jobs, attracts local investments, and generates tax revenue for local governments. Studies suggest that this tax has a negative net present value, meaning that it will ultimately lead to less aggregate tax revenue for the state of California. This report critically examines the research behind the wealth tax proposal and identifies the ramifications of this endeavor, if enacted.

II. The Wealth Tax Proposal

The wealth tax proposal, originally titled the “2026 Billionaire Tax Act,” or Proposition 40, is a ballot initiative that would impose a 5 percent one-time tax on billionaires in California.[1] The proposal was submitted by Suzanne Jimenez, but was authored by Brian Galle, David Gamage, and Darien Shanske—three law professors—in collaboration with economics professors Emmanuel Saez and Gabriel Zucman.[2] It was also funded by a prominent union: Service Employees International Union–United Health Care Workers West.[3]

The initiative argues that California’s billionaires have a light tax burden compared to ordinary people, stating that “billionaires pay less than 1.5% of their total wealth in annual taxes, including federal, state, and local taxes, according to leading economic estimates—a small fraction of what ordinary Californians pay.”[4] According to the proposal, this tax would apply to “taxpayers and trusts with covered assets valued over $1 billion; covered assets include businesses, securities, art, collectibles, and intellectual property, but exclude real property and some pensions and retirement accounts.”[5] Individuals and trusts that fall under this category would be subject to a one-time tax equal to 5 percent of their total net worth.[6] The ballot measure indicates that this tax will apply to any billionaires living in the state on January 1, 2026.[7] Notably, unlike typical taxes that are levied on realized gains, this proposal suggests the taxation of unrealized gains.

The stated purpose of this tax is “to protect access to high-quality, equitable health care, and to support funding for public education and food assistance programs.”[8] More specifically, the proposal directs 90 percent of revenues to fund Medi-Cal and similar means-tested health programs, with the remaining 10 percent allocated to public schools and food programs including CalFresh and SNAP. The ballot measure is scheduled to be placed before California voters in the November 2026 general election.

III. The Flawed Research Behind This Initiative

A. Misconceptions About the Tax Rate the Wealthy Pay on Income

This proposal has been heavily influenced by the work of UC Berkeley professors Emmanuel Saez and Gabriel Zucman to justify the concept of wealth taxation.[9] According to wealth tax proponents, the core claim supporting the need for this sort of tax is the idea that the ultra-wealthy pay too low of an overall tax rate compared to the average American.[10]

As David Leonhardt reported in 2019 in The New York Times, Zucman stated that the overall tax rate for the top 400 richest households in the nation was 23 percent.[11] Just a year earlier, an academic paper published by Saez, Zucman, and Thomas Piketty in the Quarterly Journal of Economics (QJE) estimated that the top 1 percent paid an overall tax rate of approximately 36 percent; the authors found a share of 41 percent for the top 0.001 percent of earners in the most recent year of their survey, a category encompassing billionaires and high multimillionaires.[12]

So why do their own figures contain such a large discrepancy? The difference stems from how they allocate the incidence of the corporate income tax. Although the tax is legally imposed on corporations, economists distinguish between the statutory burden (who remits the tax) and the economic burden (who ultimately bears its cost). In an increasingly open economy, capital is relatively mobile, allowing firms to reduce investment or shift capital to lower-tax jurisdictions in response to higher corporate tax rates. As investment falls, workers have less capital with which to produce, reducing labor productivity and placing downward pressure on wages and employment opportunities. Depending on market conditions, firms may also pass part of the tax on to consumers through higher prices. For these reasons, much of the empirical literature allocates the corporate tax burden across shareholders, workers, and consumers rather than assigning it exclusively to capital owners, as well-established economic research has always maintained.[13]

In their 2018 analysis, Saez and Zucman largely followed this conventional approach to corporate tax incidence. In the analysis recounted in the 2019 New York Times article, however, they adopted a different assumption that assigned the entire corporate tax burden to shareholders. Because top-income households own a disproportionate share of corporate equity, this methodological choice substantially increased the estimated tax burden on the highest-income earners.

Since shareholders concentrate among the wealthy, and since federal corporate tax rates are lower than top personal income tax rates, their newly adopted estimation method instantly changed the overall rate for top earners from 41 percent to just 23 percent. Unlike the earlier estimates from 2018, Saez and Zucman’s new numbers from 2019 did not undergo scholarly peer review, where they likely would have faced intense skepticism. Instead, the pair released their new numbers to opinion journalists including David Leonhardt, a columnist at The New York Times.[14] Saez and Zucman’s empirical work on the California billionaire tax proposal retains these same unconventional accounting practices from 2019 without addressing their conflict with the mainstream corporate tax incidence literature.

Saez and Zucman’s empirical claims are also complicated by additional data reliability issues. Since personal income tax and other financial records are protected by privacy laws, the pair must rely on alternative sources to estimate the net worth of wealthy individuals in California. They adapt the Forbes 400 list for this purpose and use it to augment their data. The Forbes 400 list was not intended for this purpose, though, and comes with several reliability issues. For example, a 2010 study by a group of IRS statisticians found that the Forbes 400 dramatically overestimates the net worth of individuals in their lifetimes when compared to probate records of their estates after death. Other complications include a double-counting problem that arises when converting Forbes 400 measures of shared family fortunes into individual tax burdens.[15]

David Splinter, an economist for the Joint Committee on Taxation, applied a series of adjustments to Saez and Zucman’s estimates for California to address double-counted income and other imprecisions on the Forbes 400 list.[16] His corrected series shows that individuals in the top 400 paid an average effective tax rate of 38 percent between 2018 and 2020, as compared to the 24 percent claimed by Saez and Zucman for this period.

According to the Independent Institute, when compared to other estimates like income inequality, including their own previously published statistics from 2018, Saez and Zucman’s new statistics become a clear outlier.[17] Their claim that the wealthiest earners pay a lower effective tax rate than average Americans is overstated, built upon a string of statistical errors, data manipulation, and unfounded assumptions that conflict with mainstream economic consensus about how tax burdens are shared.

Saez and Zucman also predicate their arguments on an exaggerated view of wealth concentration in the United States. A 2021 paper by Matthew Smith et al. highlights the divergence between the wealth-share estimates produced by Piketty, Saez, and Zucman (PSZ) and those generated using alternative methodologies, concluding that there is “strong disagreement across series about the level, trend, and composition of top wealth within the top 1% in the twenty-first century.”[18] The authors build upon previous research to develop their own estimate for the wealth share of the top 1 percent, finding “less wealth concentration relative to the equal-returns, individual-level approach in PSZ, especially at the very top.” The researchers also incorporate the Forbes 400 list into their estimate, with results indicating that those individuals only accounted for 2.8 percent of household wealth in 2016. Unlike the PSZ model, Smith et al. conclude that “incorporating the Forbes data has only a modest effect on our overall top share estimates.”

Recent data assembled by the Cato Institute shows that the rich pay the vast majority of federal taxes, including income, payroll, corporate, and other taxes.[19] During the Biden administration, a study by the US Treasury found evidence that the United States has a highly progressive tax system, where the top 0.001 percent of earners pay an effective tax rate of 41 percent, after taking federal, state, and local taxes into consideration. It also found that the top 0.00005 percent of earners—the ninety-two highest-income taxpayers—paid an even higher effective rate of roughly 45 percent.[20]

The data makes it clear that high-income Americans face substantial tax burdens on their realized income, which contradicts the claims of Saez and Zucman.

B. Misconceptions About “Buy, Borrow, Die”

Wealth tax proponents often make a more nuanced argument that wealthy individuals can minimize their tax burden by reducing the amount of income they realize. These proponents often argue that billionaires can avoid taxation through strategies like “buy, borrow, die,” which allow them to access wealth without triggering taxable income. While sophisticated tax strategies do exist, it is important to understand what these tactics really entail and to understand the underpinnings behind their viability.[21]

In a self-published paper that was not peer-reviewed, Saez and authors of the billionaire tax scheme justify the California billionaire tax, in part by arguing that “the main weakness of the California tax system” is that “ultra-wealthy households have many ways to enjoy a lavish lifestyle without selling most of their holdings, and so can largely avoid the individual income tax.”[22] This argument implies that instead of making “actual” income, ultra-high-net-worth individuals borrow against their net worth to fund their lifestyle. Ironically, in a related 2021 self-published paper that was not peer-reviewed, Saez and Zucman previously proposed this strategy to fund a wealth tax. They indicated that “billionaires can easily borrow against their wealth or sell part of their business stakes to pay the tax.”[23] Both papers were posted without scrutiny to Saez’s and Zucman’s faculty websites hosted on UC Berkeley’s domain.

The “buy, borrow, die” strategy is a tactic that many ultra-wealthy individuals pursue to minimize their tax liability.[24] With this strategy, individuals can collateralize their assets and borrow against them for cash. These loans are usually referred to as securities-backed lines of credit (SBLOCs).[25] As long as individuals’ assets appreciate at a level that exceeds the interest rate, they can maintain a margin balance without disrupting the compounding of their wealth. When those individuals die, the accrued interest is paid to the lenders out of the estate, and the remaining estate is inherited at a step-up basis—at current market value—eliminating capital gains tax liability.[26] The inheritance (if above $27.98 million for the estate of a married couple) is still subject to estate tax, though, which can be as high as 40 percent for any estate that exceeds the exemption by $1 million or more.[27]

It is important to note that while this strategy does exist and is completely legal, the social ills of it are often overstated. First and foremost, it should be noted that the “buy, borrow, die” strategy is a result of federal tax regulations; no state has regulations that prohibit this strategy. Furthermore, because this is the result of federal tax regulations, it is not “the main weakness of the California tax system,” but rather a feature of every state’s tax system. It is also worth noting that this strategy is not available only for those with an ultra-high net worth, but is also available to ordinary people.[28] Through popular brokerage firms like Robinhood, individuals can not only borrow against their stocks to buy more equities but also take out their own version of an SBLOC through “margin withdrawal.”[29] Typically, the larger the loan—whether a traditional margin loan or an SBLOC—the lower the interest rate.[30] But even if wealthy individuals can borrow at lower rates, that does not change the fact that this strategy is accessible to everyone. The peer-review system, while imperfect, is very effective at filtering the kinds of erroneous statements and flawed analysis that fill these papers.

Furthermore, this strategy only works if assets continue to appreciate. Real asset appreciation implies that value is being created through productive economic activity. If assets fail to appreciate in a way that keeps up with interest, lenders can initiate a “margin call” and liquidate collateral assets.[31] This technique is not limited to the wealthy, but is available to anyone with assets; retail investors can collateralize their investments to make further investments on standard brokerage platforms like Robinhood and Charles Schwab. This strategy is also not without risk—in a market correction or crash, not only can people be forced to liquidate their assets at a loss, but the liquidation event can also trigger a massive tax liability if massive, unrealized capital gains are involved.

The viability of this strategy can also heavily depend on market interest rates.[32] An increase in the federal funds rate by the Federal Reserve could dramatically affect the attractiveness of using leverage.[33] Part of the reason that this strategy has been so prolific over the last two decades has been because of a low interest rate environment.[34] It is also worth noting that many billionaires, such as Elon Musk, have large portions of their net worth tied up in a few stocks, and very often those stocks can be volatile. For example, between its 2022 peak and its 2023 trough, the per-share value of Tesla stock declined by more than 70 percent before making a subsequent rebound.[35] Asset volatility can dramatically affect the viability of “buy, borrow, die,” especially if the debt is being used to fund a lifestyle instead of being utilized to buy other assets and diversify. As a recent paper points out, there is considerable evidence that increases in asset prices often reflect changes in discount rates (rates that account for annualized opportunity cost) rather than actual improvements in expected cash flows. In other words, asset prices fluctuate because investors capitalize the same expected cash flows at different discount rates, which are typically heavily influenced by market interest rates.[36]

Most importantly, despite the existence of this tax minimization strategy, billionaires in California still pay taxes. Researchers at the Hoover Institution found that California’s 212 billionaires contribute an estimated $3.3 to $5.8 billion annually in state income taxes.[37] In FY 2023–2024, California collected $83.87 billion in personal income taxes (PIT).[38] Furthermore, the fact that this is not a tax avoidance panacea is exemplified by the fact that people like Elon Musk have publicly admitted to paying immense amounts of tax. Elon Musk claimed that for the 2021 tax year, his tax bill amounted to more than $11 billion.[39] If “buy, borrow, die” was a foolproof tax avoidance scheme, this would not be the case. Furthermore, another recent paper attempted to examine the frequency of “buy, borrow, die,” finding that among the top 0.01 percent of wealth holders, new borrowing only represented 2.4 percent of their total economic income in 2022, with economic income taking unrealized gains into consideration. The authors conclude that “wealthy Americans do not use household borrowing to unlock and consume a large fraction of unrealized gains.”[40]

The wealthy also cannot avoid income taxes on dividends and other realized income, which is subject to taxes once it is received, regardless of preference or planning. This is especially true in California, where state tax law does not provide preferential treatment for “qualified dividends,” unlike federal tax policy.[41] According to Smith et al. (2021), among the 2016 Forbes 400 list, the vast majority of those who were “public equity rich” owned companies that pay dividends. Those dividends come with a tax bill.[42]

Ultimately, when billionaires who utilize “buy, borrow, die” die, the interest that lenders collect upon death is taxable, meaning at the end of the day, tax is paid by somebody. Stocks can only meaningfully appreciate if they produce economic value, which also creates tax revenue for governments at different stages of the supply chain. Therefore, even if it’s possible for some people to mitigate taxes by not paying taxes on their appreciated shares, the economic activity that those shares represent still creates tax revenue for governments, even if it’s not paid by them directly.

C. Underplaying Capital Flight

In defense of the California billionaire tax, multiple parties associated with the endeavor have claimed that the ultra-wealthy will not flee the state. Brian Galle, one of the authors of the proposal, stated in an interview with the San Francisco Examiner, “I don’t think anyone’s really leaving.”[43] Despite Galle’s claim, the same self-published wealth tax “expert report” that he helped to co-author incorporates a 10 percent avoidance rate into its revenue projections, implicitly recognizing that wealth taxes induce some taxpayers to relocate.[44]

The reality is that many wealthy California residents have already begun to flee. Prior to January 1, 2026, six billionaires left the state.[45] It is estimated that these six individuals would have contributed $27 billion to wealth tax revenues—more than one-fourth of the initiative’s projected revenues.[46] These individuals left in spite of the fact that, according to Kalshi, as of March 2026, there is only a 36 percent chance that the initiative passes.[47] This means that even the statistically improbable threat of a wealth tax is enough to provoke capital flight.

There has also been a noticeable increase in demand for luxury properties in Nevada. As reported in the California Globe, according to Bill Dietz, the president of Tahoe Luxury Properties, there is currently “a clear acceleration of ultra-high-net-worth buyers moving from California to Nevada, driven by both lifestyle and tax strategy.”[48] Nevada has no state income tax and certainly does not have a proposal to enact a wealth tax. There have already been several high-profile real estate purchases in the Lake Tahoe area, including a home purchase by Sergey Brin, co-founder of Google. The unprecedented demand for real estate in this area is evidence that capital flight is already underway.[49]

Wealth is notoriously difficult to tax because of its mobility. As Jared Walczak identifies in a CalMatters article, over the last six decades, fourteen European countries attempted to implement broad wealth taxes, but most of these policies were repealed due to capital flight.[50] In a world full of optionality and the existence of different legal frameworks, capital goes to where it is welcome.

The desirability of having ultra-high-net-worth residents is evidenced by the multitude of “golden visa” and residency programs that exist around the world.[51] From Cyprus to St. Kitts and Nevis, there is a plethora of options for wealthy individuals to move abroad. Unlike traditional residency programs, which are typically very selective (an individual must typically have familial or ethnic ties to a country to be granted residency), golden visa programs compete with each other in order to attract wealthy individuals because of the public revenue benefits.[52]

Some countries, such as Paraguay and Georgia, go beyond merely offering residency programs and also have territorial tax systems, meaning that income earned outside their borders is generally exempt from local taxation.[53] That policy is the opposite of that in the United States, which taxes individuals on a worldwide basis.[54]

The boutique residency and passport firm Henley & Partners tracks “millionaire migration” and assembles data on where wealthy people are moving annually.[55] In 2025, the company’s provisional wealth flows showed that the United Kingdom lost the most millionaires of any country in the world that year.[56] The country with the most inbound millionaires, on the other hand, was the United Arab Emirates—a country that is famous for not having any form of personal income tax.[57] The existence of this data is further testament to the fact that capital and wealth are mobile. If a particular jurisdiction fails to create conditions that are favorable for wealth to prosper, people will simply leave.

In order to address capital flight, Zucman has proposed taxing individuals even after they leave a particular country. In an interview about wealth taxes, he argues that billionaires should be taxed for ten years after leaving the United Kingdom.[58] Zucman and his co-authors also assume that the California wealth tax would generate a 10 percent reduction in the tax base due to tax avoidance.[59] However, this estimate appears to be on the conservative side. Peer-reviewed empirical studies suggest that a 1 percent wealth tax can reduce the taxable wealth base by between 7 percent and 17 percent, implying that behavioral responses may be substantially larger than those assumed in their analysis.[60]

This argument is, first and foremost, an admission that capital flight is a real and relevant phenomenon. It is also an extreme proposal that violates individual sovereignty and freedom of movement. The United States is one of only two countries in the world that taxes people on a global basis; the other is Eritrea, the African dictatorship.[61] In fact, the burdens associated with filing taxes every year, even years after someone has physically left the United States, are a common reason for Americans ultimately renouncing their citizenship.[62]

It should be noted that previous research regarding outmigration in the face of income tax increases in California has yielded modest results. Cristobal Young and Charles Varner analyzed the implementation of California’s 1 percent tax on income over $1 million and found that long-term migration elasticity for millionaires was near-zero.[63] Several things should be taken into consideration when interpreting these results.

As the authors point out, part of the reason why the outmigration effects were so minimal was because “proximity of income-generating jobs and social networks remain[ed] paramount.” The authors also acknowledge that having an income over $1 million is an unusual situation, stating that “most people who earn $1 million or more are having an unusually good year . . . and they are not likely to earn this much again.” If the millionaire tax functioned as a transient tax that the qualifying tax base only briefly crossed into, rather than as a recurring and persistent increase in their overall tax burden, it would be unsurprising that its effects on outmigration were minimal.

Previous research, notably the seminal 1995 paper by Martin Feldstein, has shown that increasing tax rates have provoked behavioral responses and tax avoidance.[64] Feldstein found that “a marginal increase in tax revenue achieved by a proportional rise in all personal income tax rates involves a deadweight loss of nearly two dollars per incremental dollar of revenue.” Further research on the elasticity of taxable income (ETI), co-authored by Saez, found that “there is much evidence to suggest that the ETI is higher for high-income individuals who have more access to avoidance opportunities, including deductible expenses.”[65]

While the effects of income tax increases on migration are not perfectly analogous to the effects of a wealth tax, they can be useful in establishing a behavioral precedent in how people respond to excessive taxation. The broader principle is that incentives matter and people respond to tax policy by changing their behavior and decisions.

IV. The Devastating Consequences of Wealth Taxation

The California wealth tax proposal identifies perceived shortcomings with California’s tax revenues and uses this to justify the need for the wealth tax. What this justification fails to consider is the fact that the tax will actually lead to overall decreased tax revenues in the long run.

Scholars at the Hoover Institution found that not only has 30 percent of the proposal’s tax base already left California, but that when billionaire departures are accounted for, the act would have negative net present value (NPV).[66] The one-time wealth tax pales in comparison to the permanent loss of the $3.3 to $5.8 billion that California billionaires pay per year in state income tax. All in all, the authors estimate that the NPV of the act is –$24.7 billion.

The fiscal impact of this policy would have remarkable similarities to France’s wealth tax, which led to €35 billion of capital flight.[67] According to Dr. Eric Pichet, who authored a paper analyzing the effects of the French wealth tax, “In an open world, the ISF wealth tax impoverishes France, shifting the tax burden from wealthy taxpayers leaving the country onto other taxpayers.”[68]

A comparable case study can be found in Massachusetts’s “millionaire tax.” This tax, which functions as a surtax for incomes over $1 million, resulted in a $4.2 billion decrease in adjusted gross income in the state after going into effect in 2023.[69] While it is purported that this tax has led to increased tax revenue for the state, if the outflow of high-income taxpayers continues, this may not be the case. Furthermore, a surtax on income is much less extreme than the California billionaire tax proposal, which, save for a few select taxes (such as the United States expatriation tax), is unique in taxing unrealized gains.[70]

The perverse incentives baked into this initiative would carry real economic damage. It is also entirely possible that passing this initiative could trigger capital flight among individuals who are not even included in the proposal’s tax base. As Adam N. Michel, director of tax policy studies for the Cato Institute, points out, “It would be rational for entrepreneurs and investors to anticipate that future taxes could expand further down the income distribution. Additional outmigration among the sub-billionaire or aspiring billionaire demographic would deepen the state’s net fiscal losses from the wealth tax.”[71]

As Ethan McMullen points out in an article for the Libertas Institute, “History warns us that government appetites are rarely satiated by a single class of taxpayers. The federal income tax
. . . was initially created as a modest levy exclusive to the super-rich before expanding to consume the wages of the middle class.”[72] Capital flows to where it is treated favorably, and a wealth tax would send a clear signal to asset holders that California is no longer welcoming their capital or business.

Beyond the effects of capital flight, the forced liquidations and induced sales required to fund this tax would affect other asset holders, including pension and retirement funds.[73] As Jared Walczak identifies for the Tax Foundation, “This could send stock prices plummeting to the detriment of tech employees and investors . . . including ordinary workers whose 401(k)s would take a beating if Silicon Valley founders had to offload their shares in a hurry.”[74] This legislation would also potentially force founders to convert some of their “super-voting” or Class B shares into Class A shares for liquidation purposes, diminishing the founders’ voting rights.[75]

V. Potential Illegality of the Proposal

Even if voters approve this proposal in November, it would still be subject to review, including for constitutionality. There are numerous reasons that the tax may violate the law. As Philip Hamburger, a Columbia Law School professor and a senior fellow for the American Enterprise Institute, identifies, this tax is an “uncompensated taking” that violates the Fifth and Fourteenth amendments.[76]

The Fifth Amendment reads that no person shall “be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”[77] The Fourteenth Amendment also specifies that “nor shall any State deprive any person of life, liberty, or property, without due process of law.”[78]

As previously stated, the proposal is attempting to levy a tax on any billionaires who were living in California on January 1, 2026. The retroactive nature of this tax, which could potentially tax individuals even after they have left California, will almost certainly invite legal challenges. Despite having been authored by legal scholars, the aforementioned issues reveal a fundamental misunderstanding of American constitutional protections and legal principles.

VI. Issues with the Funding Goals of Proposition 40

The purported purpose of this tax is to raise money for Medi-Cal, CalFresh, and public schools. According to the proposal, 90 percent of the wealth tax’s revenue will be used towards health care, while the other 10 percent will be used for education and food assistance. That means that intrinsic to this tax is the idea that these are worthwhile funding endeavors; in reality, the value of each of these programs is far more questionable.[79]

Medi-Cal is California’s state-run Medicaid program, designed to offer health-care coverage to low-income residents.[80] The program receives both state and federal funding. In 2025–2026, California is expected to spend $197 billion on Medi-Cal.[81] Like other Medicaid programs, Medi-Cal can create perverse incentives—contributing to higher health-care costs while also weakening incentives for individuals to take personal responsibility for their health, given the expectation that the state will ultimately cover their care.[82] As identified in a 1997 study by the Reason Foundation, “unless state governments can control Medicaid costs, they will have to raise taxes significantly or reduce other state services.” Experts have also long observed that the system is rife with fraud.[83]

As a 2010 Cato Institute essay indicates, despite the fact that Medicare was created for the elderly, senior citizens in America are “more prosperous than ever before.”[84] The authors conclude that “Congress must cut Medicare spending, both to avert a fiscal crisis and to reduce the huge and unfair government transfers from the young to the old.” This prescription is even more valuable today, considering that baby boomers are the wealthiest generation in American history; as of 2026, more than 70 percent of all wealth in America is owned by people over the age of fifty-five.[85]

To fund a program that subsidizes the wealthiest demographic in the country at the expense of the young is not a very progressive policy. The solution to increase health-care affordability throughout the country is not to bolster government budgets further, but instead to reduce spending and implement reforms to increase competition and lower the aggregate price of health care.[86]

California is already spending an exorbitant amount of money on its K–12 education program every year, and the results are lackluster. From 2024 to 2025, the total amount of money allocated to the state’s public education system from state, local, and federal sources amounted to roughly $142 billion.[87] There is very little reason to think that more money would solve the state’s education woes. Despite the state’s enormous budget, California is notorious for its low reading and math scores among middle school and elementary school students. CalMatters describes the performance scores in California as “stubbornly low.”[88] In fact, more than half of third graders in Los Angeles’s public schools fail to read at grade level.[89]

As Independent Institute Senior Fellow Williamson M. Evers identifies with reference to Los Angeles Unified School District, “Pouring in good money after bad—whether for teacher salaries or additional resources—will not do the trick.”[90] The problem in California clearly runs deeper than a fiscal shortfall, and unless underlying problems are addressed, simply increasing funding is unlikely to produce meaningful improvement.[91] Spending billions of dollars more will be a significant misallocation of resources and will not notably improve long-term outcomes. The underlying problems include curricula burdened by political messages, teaching methods that are not evidence-based, and a public-school monopoly that faces little competitive pressure to improve. Yet politicians and bureaucrats are likely reluctant to address such problems because of the political power of the state’s teachers unions.

CalFresh is California’s Supplemental Nutrition Assistance Program (SNAP), a critical element of America’s welfare system.[92] The program provides funds (via EBT cards) to low-income households and individuals to provide them with “food benefits.”[93] For years, welfare programs in California have been rife with fraud, with recipients spending funds at casinos and on cruises.[94] Nationally, more than $10 billion in SNAP funds were improperly issued in fiscal year 2023 alone.[95]

Like all forms of welfare, it is important to note that CalFresh disincentivizes self-reliance and creates dependency on the government. In fact, in October 2025, during the government shutdown, some SNAP recipients took to social media and threatened to start looting if they didn’t receive their welfare benefits.[96] This is a clear example of the adverse effects of welfare; taking those benefits away would encourage self-sufficiency and incentivize people to produce economic value to sustain themselves.

To once again quote Adam N. Michel of the Cato Institute, the problem with wealth taxes is that, “at worst, they intentionally mislead voters into believing that someone else can foot the bill for an expansive government.” The supposed deficit in California’s budget identified by the wealth tax proponents is not a problem that can be solved through increasing taxes, but rather is a symptom of bloated, expansive government programs that demand more and more resources with each passing year.

VII. Key Recommendations

A. Reject California’s Wealth Tax

Proposition 40, if enacted, would have devastating consequences for the California economy. As billionaires flee, they would take with them jobs, tax revenue, and copious amounts of investment that support the local economy. If millionaires believe that they’re next, the trickle-down effects of this policy may be even more destructive. In 2024, over six hundred thousand people left California for other states—more than any other state in the nation. If the wealth tax were enacted, this trend would only accelerate.[97]

California already has some of the highest tax rates in the nation. The Golden State is home to the highest marginal state income tax rate in the country, the highest sales tax rate, and a property tax rate that amounts to an extortionate annual liability for new homebuyers.[98] By pushing the envelope even further by implementing wealth taxes, California may very quickly realize that money does not grow on trees.

B. Curb Government Spending and End University Subsidization

Since 1982, California state government expenditures have increased at an annualized rate of 6.26 percent, compared to an average inflation rate of just 2.83 percent.[99] This trend has accelerated in recent years. Over the past decade, California government expenditures have grown at an annualized rate of 7.51 percent, while inflation averaged just 3.25 percent over the same period. A government that allows spending to grow at more than twice the rate of inflation will inevitably face pressure to find new sources of revenue to sustain its ever-expanding programs and obligations.

Unlike the private sector, governments are not incentivized to allocate resources efficiently. They do not need to produce things to generate revenues; rather, their income is derived from taxing the productivity of others and the risks they’ve taken. In the private sector, if money is squandered or spent foolishly, companies go out of business; in the public sector, funds are replenished simply by taxing the masses.

A government employee can quite literally produce no value for society and still remain employed because the source of their salary is disconnected from productivity. Rather than being earned through the creation of wealth, their compensation is funded through a system that drains resources from the productive economy. This is not to say that there are not government workers who do contribute value to society, but rather that, structurally, they are not incentivized to do so in the same way that workers in the private sector are. These factors create a culture of wasteful spending that continually compounds, creating never-ending demand to tax the private sector.

For the reasons indicated earlier, not only will the wealth tax lead to lower tax revenues in the long run, but even if this tax did produce positive cash flows, it would not cure the underlying condition that relentlessly demands increased resources. To reduce calls for tax policies that harm the economy, governments must privatize their functions when possible and implement extreme fiscal discipline. An example of the latter can be found in the country of Georgia, where the country’s constitution was amended so that its budget deficit cannot exceed 3 percent of GDP.[100]

Another part of the problem is when university faculty use their research and teaching time to promote themselves as social architects. As identified by Independent Institute Senior Fellow Phillip W. Magness, the departments of many universities have oriented themselves towards political activism over teaching and traditional scholarship.[101] As mentioned, the so-called expert reports and opinion articles that claim to support this billionaire tax proposal did not follow established publishing standards. They were self-published papers that did not undergo peer review but that nonetheless live on the UC Berkeley web domain. This is not what taxpayers who fund higher education in California signed up for. Yet the long-standing leftist ideological predilection present in American universities has created a culture in which people are promoted on the basis of ideological conformity rather than on the basis of merit. This trend has influenced the research produced by universities, often giving its work an ideological tilt.

All of this has been enabled by the fact that most universities are the recipients of federal and state subsidies, as argued in Let Colleges Fail by Independent Institute Senior Fellow Richard K. Vedder.[102] Vedder argues that by ending “third-party safety nets,” universities would be forced to compete in the marketplace of ideas, introducing a Schumpeterian phenomenon of “creative destruction” to higher education.

Vedder argues that reliance on federal funding has essentially turned most universities into “wards of the state.”[103] It should not be surprising, therefore, that the same academics whose existence is reliant on taxpayer resources advocate for greater taxation.

While wealth tax proposals and research would likely continue even if university subsidization were ended, letting some colleges fail would introduce an element of realism and competition into higher education, serving as a vital hedge against the current echo chamber that defines modern academia.

VIII. Conclusion

The data is clear that the United States has a very progressive tax system wherein the wealthy pay more than their fair share. The perceived inequity that underlies the wealth tax proposal is a myth.

Over the years, California has continually embraced policies that have driven people and capital out of the state. Data from the California Legislative Analyst’s Office shows that the Golden State has experienced persistent net domestic outmigration for more than a decade.[104] The data also reveals that this trend has increased for those with higher incomes and graduate degrees. If enacted, the billionaire wealth tax, and the precedent it sets, may be the straw that breaks the camel’s back. While the exact magnitude of people leaving is difficult to predict, prior research and standard economic reasoning can at least help us to understand the direction of travel.

In addition to the negative economic consequences that the wealth tax would have, an examination of the programs that the initiative hopes to fund finds their value to be questionable. Furthermore, even if billionaires were taxed and these social programs were funded, it would not solve California’s addiction to spending money. Without serious fiscal reforms, the state will likely continue to spend more money with each passing year, meaning that ultimately, when there are no billionaires left to tax, the state government may turn its sights elsewhere.

There is no such thing as a free lunch. If California taxes away the sources of prosperity, it will quickly learn the lesson that Adam Smith articulated centuries ago: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”[105]

Acknowledgments

I thank Williamson M. Evers, Jonathan Hofer, Edward J. López, Phillip W. Magness, Daniel Sánchez-Piñol, and two anonymous peer reviewers for their contributions to the refinement of this report.

Notes

[1] Suzanne Jimenez, “The 2026 Billionaire Tax Act, Initiative No. 25-0024, Amendment 1,” California Office of the Attorney General, November 24, 2025.

[2] Blake Dodge, “Who Wrote California’s Wealth Tax Proposal?,” PirateWires, February 13, 2026.

[3] Kristen Hwang, “5 Things to Know About California’s New Billionaire Tax Measure,” KQED, June 18, 2026.

[4] Jimenez, “The 2026 Billionaire Tax Act, Initiative No. 25-0024, Amendment 1.”

[5] “Imposes One-Time Tax on Certain Individuals and Trusts. Initiative Constitutional Amendment and Statute. Initiative No. 25-0024, Amendment 1,” California Office of the Attorney General, December 26, 2025.

[6] Gabriel Petek, “Pursuant to Elections Code Section 9005 – A. G. File No. 25-0024, Amendment 1,” California Legislative Analyst’s Office, December 1, 2025,

[7] Ibid.

[8] Jimenez, “The 2026 Billionaire Tax Act, Initiative No. 25-0024, Amendment 1.”

[9] “Emmanuel Saez,” University of California, Berkeley, Department of Economics; “Gabriel Zucman,” University of California, Berkeley, Department of Economics.

[10] Phillip W. Magness, “Do Billionaires Really Pay No Taxes?,” The Dispatch, November 11, 2025, https://thedispatch.com/article/billionaires-tax-rates-fair-share-inequality.

[11] David Leonhardt, “The Rich Really Do Pay Lower Taxes Than You,” The New York Times, October 6, 2019, https://www.nytimes.com/interactive/2019/10/06/opinion/income-tax-rate-wealthy.html.

[12] Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts: Methods and Estimates for the United States,” Quarterly Journal of Economics 133, no. 2 (May 2018): 553–609.

[13] Arnold C. Harberger, “The Incidence of the Corporation Income Tax Revisited,” National Tax Journal 61, no. 2 (June 2008): 303–12; Jack Salmon, “Who Really Pays? Reevaluating the Corporate Tax Burden,” Mercatus Center, September 23, 2025; Alan J. Auerbach, “Who Bears the Corporate Tax? A Review of What We Know,” Tax Policy and the Economy 20 (2006): 1–40; Juan Carlos Suárez Serrato and Owen Zidar, “Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms,” American Economic Review 106, no. 9 (2016): 2582–2624.

[14] Leonhardt, “The Rich Really Do Pay Lower Taxes Than You.”

[15] Brian Raub, Barry Johnson, and Joseph Newcomb, A Comparison of Wealth Estimates for America’s Wealthiest Decedents Using Tax Data and Data from the Forbes 400: Proceedings of the 103rd Annual Conference on Taxation (National Tax Association, 2010).

[16] David Splinter, “Comment on ‘How Much Tax Do Billionaires Pay?’,” August 2025.

[17] “Inequality Project Research,” Independent Institute.

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[19] Adam N. Michel and Santiago Forster, “Tax Day: Five Charts on Who Pays, How Much,” Cato at Liberty (blog), April 10, 2026.

[20] Ibid.

[21] Paul Matzko and Peter Van Doren, “Inequality: American Buy, Borrow, and Die vs. Scandinavian Wage Compression,” Cato Institute, August 14, 2025.

[22] Brian Galle, Darien Shanske, Emmanuel Saez, and David Gamage, “Expert Report on the California 2026 Billionaire Tax: Revenue, Economic, and Constitutional Analysis,” Institute on Taxation and Economic Policy, April 27, 2026.

[23] Emmanuel Saez and Gabriel Zucman, “How to Get $1 Trillion from 1000 Billionaires: Tax Their Gains Now,” BibBase.

[24] Matzko and Van Doren, “Inequality: American Buy, Borrow, and Die vs. Scandinavian Wage Compression.”

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[28] Kenton, “What Defines an Ultra-High-Net-Worth Individual (UHNWI)?”

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[34] “America’s Rich Never Sell Their Assets. How Should They Be Taxed?,” The Economist, June 20, 2024.

[35] “Tesla Inc. (TSLA) Stock Price and News,” Google Finance.

[36] Benjamin Jaros, Joshua D. Rauh, Gregory Kearney, John Doran, and Matheus Cosso, “The Net Present Value of the Billionaire Tax Act: An Assessment of the Fiscal Effects of California’s Proposed Wealth Tax – SSRN, abstract no. 6340778,” March 4, 2026.

[37] Ibid.

[38] “April 2024 California Personal Income Tax Daily Revenue Tracker,” California State Controller’s Office.

[39] Ryan Browne, “Elon Musk Says He Will Pay More Than $11 Billion in Taxes This Year,” CNBC, December 20, 2021.

[40] Edward Fox and Zachary Liscow, “The Role of Unrealized Gains and Borrowing in the Taxation of the Rich,” Journal of Public Economics 252 (2025): 105518.

[41] Nathan Reiff, “What Are Qualified Dividends, and How Are They Taxed?,” Investopedia, accessed April 21, 2026.

[42] Smith, Zidar, and Zwick, Top Wealth in America: New Estimates and Implications for Taxing the Rich.

[43] Troy Wolverton, “Fears of California Billionaire Exodus Overblown, Tax Proponent Says,” San Francisco Examiner, February 11, 2026.

[44] Galle, Shanske, Saez, and Gamage, “Expert Report on the California 2026 Billionaire Tax: Revenue, Economic, and Constitutional Analysis.”

[45] Jacqueline Munis, “Only 6 Billionaires Left California over Its Proposed Wealth Tax—but They Took $27 Billion in Potential Revenue with Them,” Fortune, March 17, 2026.

[46] Ibid.

[47] “Will the California Billionaire Wealth Tax Initiative Pass?,” Kalshi Prediction Market, 2026.

[48] Megan Barth, “California’s Wealth Creators Flee to Nevada as Proposed Billionaire Tax Sparks Exodus,” California Globe, April 9, 2026.

[49] Ibid.

[50] Jared Walczak, “What Europe’s Experience with Wealth Taxes Could Teach California,” CalMatters, February 19, 2026.

[51] “Should You Invest in a Golden Visa? Pros and Cons 2025,” Nomad Capitalist, January 6, 2025.

[52] “Cyprus Golden Visa: The Ultimate Guide,” Nomad Capitalist, February 21, 2025; “St. Kitts and Nevis Citizenship by Investment: The World’s Oldest CBI Program Examined,” Nomad Capitalist, July 7, 2026; Kristin Surak and Yusuke Tsuzuki, “Are Golden Visas a Golden Opportunity? Assessing the Economic Origins and Outcomes of Residence by Investment Programmes in the EU,” Journal of Ethnic and Migration Studies 47, no. 1 (2021).

[53] “Territorial Taxation,” Tax Foundation, 2026.

[54] Kristian Fors, “America Should Stop Taxing Its Citizens Abroad,” Independent Institute, August 14, 2024.

[55] “Henley Private Wealth Migration Report 2025,” Henley & Partners.

[56] “Country Wealth Flows,” Henley & Partners.

[57] “United Arab Emirates: Individual—Taxes on Personal Income,” PwC, last updated March 12, 2026.

[58] Gabriel Zucman, “The Economist Billionaires Fear: This Is How We Get a Wealth Tax,” May 24, 2026, YouTube.

[59] Jasper Boll, Emmanuel Saez, and Gabriel Zucman, “California Billionaires: Wealth, Taxes, and Wealth Tax Revenue Estimates,” Working Paper No. 35218 (National Bureau of Economic Research, May 2026).

[60] Arun Advani and Hannah Tarrant, “Behavioral Responses to a Wealth Tax,” Evidence Paper no. 5 (Wealth Tax Commission).

[61] Fors, “America Should Stop Taxing Its Citizens Abroad.”

[62] Ibid.; “Why and How I Renounced My U.S. Citizenship: My Expatriation Story,” Nomad Capitalist, April 30, 2024.

[63] Charles Varner, Cristobal Young, and Allen Prohofsky, “Millionaire Migration in California: Administrative Data for Three Waves of Tax Reform,” in 111th Annual Conference on Taxation (NTA, 2018).

[64] Martin Feldstein, “Tax Avoidance and the Deadweight Loss of the Income Tax,” National Bureau of Economic Research Working Paper no. 5055 (March 1995).

[65] Emmanuel Saez, Joel Slemrod, and Seth H. Giertz, “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review,” Journal of Economic Literature 50, no. 1 (2012): 3–50.

[66] Benjamin Jaros, Joshua D. Rauh, Gregory Kearney, John Doran, and Matheus Cosso, “The Net Present Value of the Billionaire Tax Act: An Assessment of the Fiscal Effects of California’s Proposed Tax,” Hoover Institution, March 4, 2026; Jason Fernando, “Net Present Value (NPV): What It Means and Steps to Calculate It,” Investopedia, March 24, 2026.

[67] Tyler Cowen, “The Economic Consequences of the French Wealth Tax,” Marginal Revolution, September 16, 2024; Adam N. Michel and Chris Edwards, “Failures of Wealth Taxation,” Cato Institute, July 23, 2026.

[68] Eric Pichet, “The Economic Consequences of the French Wealth Tax, SSRN, abstract no. 1268381,” June 17, 2011.

[69] Greg Ryan, “Massachusetts Loses Billions in Income after Millionaire Tax: Bloomberg,” Massachusetts Budget and Policy Center, March 20, 2026.

[70] “Expatriation Tax,” Internal Revenue Service.

[71] Adam N. Michel, “Wealth Taxes Raise Less Revenue Than You Think,” Cato at Liberty (blog), March 10, 2026.

[72] Ethan McMullen, “California’s Billionaire Tax Is a Cautionary Tale for Other States,” Libertas Institute, June 30, 2026.

[73] James Chen, “Capital Flight: Definition, Causes, and Government Response,” Investopedia, May 7, 2026.

[74] Jared Walczak, “The Proposed California Wealth Tax Is Far Higher than 5 Percent,” Tax Foundation, January 14, 2026.

[75] Ibid.

[76] Philip Hamburger, “When Is a Tax Not a Tax?,” The Wall Street Journal, February 22, 2026.

[77] “Fifth Amendment,” US Congress.

[78] “Fourteenth Amendment,” US Congress.

[79] Jimenez, “The 2026 Billionaire Tax Act, Initiative No. 25-0024, Amendment 1.”

[80] “Medi-Cal,” Covered California, 2026; “What Is the Difference Between Medicare and Medi-Cal?,” Alignment Health Plan, 2026.

[81] Ibid.; “The 2025-26 California Spending Budget,” California Legislative Analyst’s Office.

[82] John Hood, “Solving the Medicaid Puzzle,” Reason Foundation, October 1, 1997.

[83] Christopher F. Rufo, Ryan Thorpe, Kenneth Schrupp, and Haley Strack, “Gavin Newsom’s Empire of Fraud,” City Journal, April 1, 2026.

[84] Chris Edwards and Michael F. Cannon, “Medicare Reforms,” Cato Institute, September 1, 2010.

[85] Adam Hayes, “Which Generation Is the Wealthiest in U.S History, and Why?,” Investopedia, June 9, 2025; Eric Reed, “Wealth Distribution in the U.S. By Generation,” SmartAsset, April 24, 2026.

[86] Wayne Winegarden, Promoting Choice and Competition to Improve Healthcare (Pacific Research Institute, 2025).

[87] Julien Lafortune and Brett Guinan, “Financing California’s Public Schools,” Public Policy Institute of California, November 2025.

[88] Dan Walters, “California Schools Continue to Struggle with Test Scores in Reading and Math,” CalMatters, February 4, 2025.

[89] Nina Joudeh, “Most LA Third Graders Below Basic Reading Level—but Gavin Newsom Applauds School Bosses for ‘Progress,’” The New York Post, January 15, 2026.

[90] Williamson M. Evers, “As Strike Looms, LA Schools Need Reform—Not More Spending,” Independent Institute, February 7, 2026.

[91] Eric A. Hanushek, “40 Years After ‘A Nation at Risk’: Fixing Schools Through More Efficient (and Effective) Funding,” The 74, April 24, 2024.

[92] “CalFresh,” California Department of Social Services; “Supplemental Nutrition Assistance Program (SNAP)—Putting Healthy Food Within Reach for Those in Need,” US Department of Agriculture, Food and Nutrition Service.

[93] “Electronic Benefit Transfer (EBT) Card,” California Department of Social Services; “Supplemental Nutrition Assistance Program (SNAP)—Putting Healthy Food Within Reach for Those in Need,” https://www.fna.usda.gov/snap/supplemental-nutrition-assistance-program.

[94] Ali Meyer, “California Welfare Gets Carded but Not Reformed,” Pacific Research Institute, August 3, 2011.

[95] Young Kim, “Rep. Young Kim Slams SNAP Fraud, Demands Newsom Ensure Benefits Reach Californians in Need,” press release, November 6, 2025.

[96] Chris Nesi, “Fuming SNAP Recipients Threaten to Loot If Food Stamps Are Cut Nov. 1: ‘Stay the F–K Out of My Way,’” The New York Post, October 28, 2025.

[97] Addy Bink, “The States People Have Moved to—and Left—the Most, Census Data,” The Hill, January 26, 2026.

[98] Kristian Fors, “The 2025 Los Angeles Wildfires: Lessons and Key Recommendations,” Independent Institute, January 7, 2026; “Taxes in California,” Tax Foundation; Kristian Fors, “Proposition 13 Isn’t Enough: Abolish Property Taxes in California,” Independent Institute, March 13, 2026.

[99] “Bureau of Labor Statistics Data,” US Bureau of Labor Statistics, accessed August 10, 2026.

[100] Kristian Fors, “Lessons from the Republic of Georgia on Economic Freedom,” Independent Institute, January 23, 2025.

[101] Phillip W. Magness, “The Year the World Went Woke,” Independent Institute, December 17, 2024.

[102] Richard K. Vedder, “Approaching Academic Armageddon,” Independent Institute, May 31, 2025.

[103] Richard K. Vedder, “Let Colleges Fail: The Power of Creative Destruction in Higher Education,” Independent Institute.

[104] Brian Uhler and Justin Garosi, “California Losing Residents via Domestic Migration,” California Legislative Analyst’s Office, February 21, 2018.

[105] Adam Smith, “The Butcher, the Brewer, and the Baker,” in An Inquiry into the Nature and Causes of the Wealth of Nations (Online Library of Liberty, n.d).