President Joe Biden and several states are working on plans to “tax the rich” to pay for programs that will purportedly address public needs like childcare and education, address income inequality, or reduce budget deficits.  Like similar attempts around the world to impose wealth taxes, they will stymie economic growth, fail to raise the estimated revenue, encourage businesses to move operations overseas or to lower tax states, and reduce the number of wealthy individuals.  When “the rich” leave, taxes will be increased for everyone else.

In 1990, there were 12 European countries that had imposed a wealth tax on their citizens, but only three still have such a tax.  In France, the wealth tax led to a “exodus of an estimated 42,000 millionaires between 2002 and 2012.”  In 2020, President Emmanuel Macron repealed the tax.  According to the Organisation for Economic Co-operation and Development, the wealth tax, “was expensive to administer, it was hard on people with lots of assets but little cash, it distorted saving and investment decisions, it pushed the rich and their money out of the taxing countries—and, perhaps worst of all, it didn't raise much revenue.”

During President Biden’s April 28, 2021 Joint Address to Congress, he announced that to fund the $1.8 trillion American Families Plan, he wants to raise taxes for wealthy Americans, meaning no one earning less than $400,000 is supposed to see a tax increase.  The plan would restore the top marginal tax rate back to 39.6 percent back from 37 percent, which was the rate provided during the Trump administration with the Tax Cuts and Jobs Act of 2017 (Pub. L. No. 115-97).  President Biden also plans to end supposed loopholes which have allegedly allowed high earners to avoid paying taxes, including increasing the capital gains tax, taxing carried interest as ordinary income, and eliminating the stepped-up basis for estates (in that case creating a double estate tax).  The latter two provisions have been part of the tax code for 100 years.  The President is also proposing increases in the corporate tax rate, which will end up reversing the inflow of businesses moving back to the U.S. after the Tax Cuts and Jobs Act lowered the corporate tax rate.

States that are proposing new wealth taxes on top earners and corporations include California, New York, and Washington.

In New York, the legislature and Gov. Andrew Cuomo (D) have been working on a budget agreement that would increase income taxes on New York City’s highest earners and corporations.  Gov. Cuomo was previously hesitant to raise taxes in the past because of concerns it would drive businesses out of New York, but due to revenue shortfalls stemming from the pandemic, he decided to move forward with the plan.  Top wage earners in New York City will likely be paying between 13.5 percent to 14.8 percent, and the increase is expected to generate $4.3 billion a year.  The likelihood of the wealth tax increase generating that much income is zero, as the city has already seen a mass exodus of wealthy taxpayers to low or no tax income states like Florida and Texas.  The 2020 Census revealed that New York lost more population than any other state since 2010.

In California, another state that lost population over the past 10 years, the California Tax on Extreme Wealth bill would impose a 1 percent tax on those who have a net worth over $50 million and a 1.5 percent tax on those who have a net worth over $1 billion.  A University of California-Berkeley study estimates that this would generate around $22.3 billion a year.  Moderate Democrats say that the wealthiest already pay “a significant share of the state’s income tax” and the imposition of additional taxes could cause them to leave the state, but progressive Democrats believe it will close the state’s inequality gap.  This bill would also continue collecting taxes on current California residents who choose to relocate to another state, raising questions about the bill’s constitutionality. 

As evidence that individuals and companies flee high tax states, a February 22, 2021 article in The Center Square by Bethany Blankley noted that more than 50 large companies have moved their headquarters from California to states like Texas since 2014, including Oracle, Hewlett Packard, and Tesla, which all began to leave in  2020.  Charles Schwab left San Francisco for Dallas, and Apple is building a new campus in Austin.  Wealthy individuals like SpaceX and Tesla CEO Elon Musk and Oracle CEO Larry Ellison follow their companies to the new states.  Blankley cited an analysis from the website Wirepoints that California lost $24.9 billion in adjusted gross income between 2010 and 2018.  If the people who pay the highest percentage of taxes keep leaving California and other states with big-spending plans, the middle class will have to pick up the slack.

The Washington state legislature approved a 7 percent tax on capital gains over $250,000, which includes the sale of stocks and real estate.  The capital gains tax is intended to fund the state’s operating budget between 2021-2023.  Washington is home to some of the richest people in the world, including Jeff Bezos who is the founder and CEO of Amazon, as well as Bill Gates, one of the co-founders of Microsoft (the state does not have an income tax).  The bill is expected to be signed by Governor Jay Inslee (D), who has indicated his support for the measure.

According to the Manhattan Institute, wealth taxes are the least desirable form of revenue stream because wealth is too difficult to measure.  Even though the federal government taxes income, the Internal Revenue Service does not keep track of wealth.  Privately held companies that are not traded on the stock market also cannot not have their wealth values determined, as they are not required to report to stock owners.  It is also difficult to measure wealth value since “financial assets can be hidden or moved abroad with the click of a mouse or converted into other assets.”

Imposing a wealth tax will drive out the wealthiest individuals and large companies that pay the most in taxes.  It will not resolve income inequality or reduce budget deficits.  States should instead cut waste, fraud, abuse, and mismanagement from their budgets, which is a much more effective way to provide needed services to their inhabitants.