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The concept of a billionaire's
tax is one that has become
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somewhat fashionable for
political leaders in the last
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several years. They see it as a
necessary way to somewhat level
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the playing field between the
haves and the have nots.
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California is the latest state
to bring this idea forward. But
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do these ideas work? And we
asked that question and more of
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Kent Smetters, who's Faculty
Director of the Penn Wharton
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Budget Model. He's also
Professor of Business, Economics
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and Public Policy at the Wharton
School. Kent, great to catch up
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again. How are you, sir?
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It is good to be back. Doing
well. Hope you guys are doing
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well as well.
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Thank you. We are. I guess,
let's start with the— I think, to
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put some background on this, the
idea of a tax like this, where
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did it actually come from in the
first place?
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Yeah, yeah. So there's— at Penn
Wharton Budget Model, we did
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some—a little bit of surveying, as
well as talking to a lot of
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business leaders and
policymakers and so forth. And
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there's a couple things that
keep coming back that both come
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from the left and the right on
the political spectrum. Kind of—
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kind of fallacies, if you will,
in terms of how to get money and
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why the budget problem is not
necessarily a big problem, which
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is actually not true. But one of
these is that, man, there's just so
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much revenue out there that
we're not getting, in the form of
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kind of really wealthy people,
billionaires. And so the simple
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idea was, okay, suppose that we
actually tried to grab all that
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money. And so I just did a
hypothetical exercise with
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policymakers, and said the
following. "Listen. I mean,
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suppose we do the following
kind of upper bound calculation."
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We say, '"All right, let's just
outlaw being a billionaire. Let's
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just actually grab all the
wealth above $999 million, and
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more nines and change. And we'll
grab everything above $1 billion.
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And then let's suppose
hypothetically that we could
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actually get it, if the money
can't be moved. Let's suppose
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hypothetically that we could
then sell all those assets at
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current market prices. That we
wouldn't— you know, market
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prices wouldn't plummet. We won't
be selling it at a fire sale and so
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forth. With— even with all that,
you know, pretty— call it
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egregious, you know, extreme
assumptions in terms of
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modeling, how much money could
we actually get? How much— for
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how long could we actually fund
the federal government?" And
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people— just the way I ask that
question, people often think,
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"Okay, it must not be a big
number." So they'll guess, like,
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you know, maybe 10 years, 15
years. And it actually turns out
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it's around 8.8 months right
now. And so it's way less than
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what people think. And so people
are just completely uncalibrated
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in terms of the size of the
federal problems that we have,
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in terms of the size of the
spending that we have, the size
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of the federal budget deficits
that we have, the exploding debt
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path that we're on. And that
lack of calibration is really on
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both sides. So I'm picking a
little bit more on the left
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right now, but the right has its
own problems in terms of how
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they're conceptualizing AI and
things like that.
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But the assumption, I guess, is
that if you were to bring a tax
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like this into play, that it
would have a significant impact
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on reducing debt. In this case,
in a state. Because it seems
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like states are the ones that
are trying to move this forward
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here. But other countries have
tried this as well.
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Yeah. And almost every country,
except for three, who've tried
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it have gotten rid of the
wealth tax. And the reason why
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is that consistently, they've
found that it's raised a lot
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less revenue than they
originally projected. And so
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over a dozen countries—
including France, by the way,
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that's, you know, currently hot
debate about this idea right
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now— had wealth taxes. They all
got rid of it, because they
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realized that the distortions
caused to the economy just way
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outweighed any revenue that they
were getting. In fact, the
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revenue that they're actually—
you know, it's way less than
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they're expecting. And that's at
a country level. I mean, it's
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much harder to move your assets
out of a country. Much easier to
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move your assets out of a state
like California, especially when
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you think about, so much of the
wealth in California is tech based.
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And so as a result of that, I
mean, lots of that can be done—
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you know, if I'm an owner or
founder of one of the big tech
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companies, I can easily move my
domicile to another state.
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Right. You can go from California
to Nevada or Utah, or wherever else
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you wanted to go.
- Or Texas. There's Texas.
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Yeah. Exactly. One of the
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things, though, I guess you also
have to consider, is the cost of
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running a program like this.
Correct?
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It is, it's— here's
the— what makes it a little bit
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different than other programs,
and that is, usually, when it
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comes to things like income,
even a sales tax, things like
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that, it's pretty clear what
you're measuring. The problem
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with wealth is that a lot of
wealth is not publicly traded.
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It's not marked kind of daily.
Yes, your 401(k) accounts and
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your other, you know, taxable
accounts are marked pretty
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frequently in terms of their
value. But that's not true for—
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with a lot of wealth owned by
billionaires. A lot of it's very
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private. And the last marking of
that wealth, even if it's
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venture backed— I mean, that
last series that might have
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been— you know, that evaluation
was established— was maybe a
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couple years ago. And so it
actually is not marked very
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frequently. So here's the
problem, is that I could
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actually be a billionaire and
not actually know it. And so
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what happens if my company does
take off in value? My next
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funding round, I go from $100
million valuation to a $2 billion
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valuation. And then when
it was only worth $100 million
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based on a pretty dated funding
round, you know, the government
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says, "No, no, no. That was really
worth— you know, in the
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intermediate time, it was really
worth a billion dollars. You
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should have— you should have
been paying taxes on that." And
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so as result, you're going to
have a lot of people having to
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do these valuations just in
case, so they don't commit tax
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fraud or get accused later. So
anybody who is hopeful that
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their company's gonna pop in
value, unless you just had a
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really recent funding round, you
better be doing these valuations
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a lot, and including everything,
including your jewelry, your
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property, private property,
everything— a house should be
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marked and valued. And that's a
really tough exercise to do.
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So I think we've laid out the
case where a billionaire's tax
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is very tough to kind of pull
off. So then, what are some of
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the other options potentially
out there that need to be
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considered in order to deal with
the level of debt that we are
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seeing, not only at the federal
level, but at the state level as
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well?
- Yeah.
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So, California has had this
problem for several decades,
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where their revenue bounces
around a lot through the
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realization of capital gains.
And the problem is— in fact,
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this happened just a couple years
ago. Big revenue increases
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because of realization of
capital gains, especially during
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COVID and so forth. And so what
happens is that they will
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project this out and say,
"Hey, you know what? We're gonna
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get all this fancy revenue going
forward, and we're gonna spend
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that money." So they put
themselves on a spending path
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going forward that is assuming
this revenue comes in, even
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though their own equivalent of
the CBO, called the LAO, warns
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them that that's not true. They
still do it anyway. So they get
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this big mismatch between
spending and actual revenue
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coming in. And this has happened
multiple times before in
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California. So ultimately,
unless they get that spending
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down, they're gonna have to get
revenue up. A wealth tax is gonna be very
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hard to do it. And so it's—
you're back to your classic
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means of more income taxes,
which already is pretty high in
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California, especially at the
high end. You know, put the
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highest marginal tax rate in
California added to the federal
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rate. Those people are actually
paying the majority of their income
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in taxes. And so over 50 cents
on the dollar in taxes. So it's
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already fairly distorting. So
there's pretty much no option in
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California outside of really
broad-based taxes like a more
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aggressive sales tax, a value-
added tax, something of that
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nature, where they're going to
get more— a lot more revenue.
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They're going to have to do some
combination of bringing the
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spending down. And if they, in
fact, want more revenue, it's
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going to have to be very broad-
based.
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Kent, always great to talk with
you and get your insight. Thanks
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very much.
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Pleasure.
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Thank you. Kent Smetters,
who is
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Faculty Director of the Penn
Wharton Budget Model, and also
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Professor of Business, Economics
and Public Policy
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here at the
Wharton School.
