Taxing Wealth, Undermining Principles

A recent California billionaire tax ballot initiative has added to the growing stockpile of wealth tax proposals at all levels of government. All are ostensibly aimed at ensuring “the rich pay their fair share.” The proposals to extract additional revenue from “the rich” are as old as legislation itself. However, a wealth tax epitomizes a flawed understanding of both private property and wealth in general. This extractive mindset threatens to erode the rule of law—the foundation on which wealth creation in the United States rests—which requires the equal treatment of all persons according to general, stable, predictable, and consistently-applied rules.

Historically, the United States has regarded private property as a fundamental right. It is not merely a priviledge to be balanced against the general interest. The latter is a view prevalent among European countries that have long experimented with wealth taxes. Despite this experimentation, only three still maintain such taxes, and their experience does not recommend the policy.

Although France curtailed its net-wealth tax in 2018, evidence of wealth flight is ample. Roughly 60,000 millionaires left the country in the years following progressive taxation of net worth exceeding €1.3 million. Annual GDP growth declined by about 0.2 percentage points in the aftermath.

Norway’s recent increase in the wealth tax rate to one percent of net worth exceeding 1.76 million kroner (about $174,000) has likewise prompted an “exodus of the wealthy.” More than 30 billionaires and multimillionaires have reportedly left Norway in 2022. As a result, its GDP is projected to shrink by 1.3 percent over the long term.

Meanwhile, revenues generated from such proposals remain rather modest. In 2023, wealth-tax revenues ranged from 0.57 percent of overall tax revenues in Spain to 4.28 percent in Switzerland. Crucially, high-net-worth individuals disproportionately channel their wealth into productive assets. Because economic growth is a function of capital formation and innovation, taxing the net worth of the wealthy, therefore, penalizes key sources of growth. This holds back improvements in living standards for everyone. In light of the risks of capital flight and slower economic growth, wealth tax revenues prove counterproductive.

A wealth tax is anathema to both the current US tax code and the Constitution. Unlike income taxes, which apply to identifiable cash flows (wages, investment returns, or business profits), wealth-tax schemes seek to tax an individual’s net worth based on the estimated––often disputable––cumulative value of their varied assets. Estate and gift taxes apply only upon asset transfers, just as excise and sales taxes apply only when a taxable transaction occurs. Unlike property taxes, which attach to land and real estate––not to persons––and fund local services, a wealth tax targets individuals above a discretionary net-worth threshold.

Furthermore, implementing such a tax would require far more intrusive auditing, oversight, and financial disclosure of privately held assets than existing tax frameworks authorize.

Because wealth is not a distinct class of property, its definition would invariably entail a host of granular classifications and exemptions. Taxpayers with the type of resources that would be targeted by such a tax would predictably be able to exploit the complicated design to subject as little of their wealth to taxation as statutory loopholes would allow. This would result in different outcomes among taxpayers with similar net worth, and likely undermine the proposals revenue goals. Moreover, valuing taxable assets—especially illiquid ones such as closely held businesses—would compound administrative complexity. In addition to discretionary thresholds, the taxable base would prove inherently erratic—as individuals rise above and fall below, the net-worth threshold.

The U.S. Constitution prohibits direct taxes on individuals or their property without apportionment across the states (except for income taxes introduced under the Sixteenth Amendment). State-level wealth taxes would have to withstand the uniformity clauses—provisions guaranteeing equal tax treatment––that almost all state constitutions contain. Lawsuits challenging wealth taxes as confiscatory would almost certainly arise––and overcoming such challenges would prove incredibly demanding.

“The Rule of Law,” Hayek wrote, “implies limits to the scope of legislation.” It protects individuals’ rights against legislation “directly aimed at particular people”—even when such legislation enjoys majority support and the targeted individuals are ultra-wealthy. Besides being economically foolhardy, a wealth tax would weaken the rule of law that undergirds American institutions––undermining one of the central catalysts of the economic growth Americans have long enjoyed.