Dear Reader,

If you haven’t already heard, California wants to tax its billionaires.

A one-time 5% wealth tax on anyone in the state worth more than $1 billion.

The money would supposedly go toward healthcare, food assistance, and public education.

Just a couple days ago, Bernie Sanders penned an op-ed in the LA Times stating that billionaires must pay this tax to “save” healthcare and democracy.

And with supposedly more than 1.5 million signatures amassed in support, it looks like this measure will be going in front of voters this November.

Now look, I understand why this is getting so much traction.

People are getting squeezed.

Housing is expensive. Groceries are expensive. Healthcare is expensive. And in California, probably doubly so.

So when someone says, “Let’s make the billionaires pay,” a lot of people think – good… finally.

And when others chime in to say, “Hold on, this may backfire,” the response is vicious and immediate.

“Why are you defending billionaires – are you a billionaire?”

“Stop bootlicking!”

“They have more money than they’ll ever need, so why do you care?”

But that’s a rhetorical trap…

An emotional ad hominem designed to kill off rational discussion about things like incentives, capital flight, and other second-order consequences.

So much of discourse today has become about picking a side, and this is no different.

When someone slaps you with the label of “billionaire bootlicker”, it’s just another way of forcing you to choose between…

The “people”…

Or the billionaires.

Now, look – I’m not saying you have to feel sorry for the billionaires. You don’t need to like them.

But what’s at stake here isn’t “do billionaires deserve sympathy?”

It’s something far bigger than that…

Something that affects every single person – regardless of their current wealth. And that is:

Who Gets to Decide What Wealth Is “Deserved”?

Because that is the assumption underneath most wealth-tax arguments.

That the billionaires are hoarding wealth…

Wealth that they’ve only been able to obtain by “exploiting” labor and “extracting” money from everyone else.

But before you can decide whether a fortune is “deserved,” you have to answer a more basic question:

Where did the wealth come from in the first place?

That’s what I broke down in a recent video.

Most people think value is objective.

A car is “worth” $20,000. A burger is “worth” $5.

A share of stock is “worth” whatever the screen says.

But that’s not really how value works. Value is subjective.

You buy the burger because, at that moment, you value the burger more than the $5.

The restaurant sells the burger because it values the $5 more than the burger.

Both sides walk away better off.

That is what voluntary exchange does.

It’s the same with labor.

You take the job because you value the paycheck more than the time and labor you give up.

Your employer hires you because they value your labor more than the paycheck they give up.

Both sides profit. Neither is stealing from the other.

Both sides are exchanging something they value less for something they value more.

If you want the full breakdown of that argument, watch the video here:

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Once you understand voluntary exchange, the billionaire question starts to look different.

Because wealth is not proof that someone stole from society.

In most cases, it is proof that millions – sometimes billions – of people voluntarily chose to use, buy, work for, advertise on, invest in, or build around something that person helped create.

Take Google.

Nobody forced people to use it.

Nobody forced advertisers to buy ads.

Nobody forced employees to take jobs there.

Nobody forced investors to buy shares.

People participated because they believed they were getting something more valuable than what they were giving up.

That is the basic principle of voluntary exchange.

If a company creates something people value, and the founder owns part of that company, the founder’s wealth grows as the value of that company grows.

That does not mean every billionaire is virtuous or that every fortune is clean.

Some fortunes absolutely come from cronyism, lobbying, subsidies, bailouts, and regulatory capture.

Fine. Attack that. Attack the government machinery that creates protected winners.

But don’t confuse wealth created through voluntary exchange with wealth extracted through political power.

A fortune doesn’t become theft simply because the number gets too large.

Wealth Taxes – Good Soundbites, Ineffective Policy

The problem is that wealth taxes run into reality fast.

The first issue is liquidity.

Billionaires aren’t sitting on billions of liquid cash like Scrooge McDuck.

Most of their wealth is ownership in productive businesses. It’s not money sitting in a checking account.

And that means paying a 5% tax will require selling assets.

Imagine having to sell a chunk of your own business just to pay a wealth tax – even if you’ve never taken a single dime out of it.

And it may be a lot more than just 5%. Tax Foundation estimates that under California’s proposal, Sergey Brin could face a $50.65 billion wealth-tax liability – and more than $80 billion in total taxes once liquidation taxes are included.

Then there’s capital flight.

This is a major reason why the number of countries having net wealth taxes decreased from 12 in 1990 to just 4 in 2017.

Even when these taxes survive, they usually don’t raise much.

In 2016, individual net wealth taxes raised just 0.2% of GDP in Spain, 0.22% in France, 0.43% in Norway, and about 1.0% in Switzerland.

And those are just the first-order consequences…

Which brings us to Bastiat’s old lesson about the seen and the unseen.

The seen is easy.

Politicians promise billions for healthcare, education, food assistance, and public programs.

Voters see rich people getting taxed to pay for it. The policy “feels” fair.

The unseen second-order consequences – what economists call tax incidence – comes later.

• The capital that leaves
• The stock sold to pay the tax
• The company that gets built somewhere else
• The jobs that never appear
• The investment that never happens
• The future tax revenue that disappears before it ever shows up

The billionaire may be the legal target.

But he is not the only one who pays.

Workers pay through fewer opportunities.

Entrepreneurs pay through less available capital.

Shareholders pay through forced selling and lower returns.

By the time people notice, the politicians who promised the money are usually already blaming someone else.

Who’s Licking the Biggest Boot of Them All?

If you defend markets, incentives, ownership, and voluntary exchange, people say you’re licking the billionaire’s boot.

But there is another boot in this story – and it’s the biggest boot of them all.

The state’s boot.

Billionaires in a market economy at least have to persuade people.

Customers have to use the product.

Employees have to take the job.

Investors have to buy the shares.

Partners have to cooperate.

Users have to show up.

It’s all voluntary.

The state does not need to operate the same way.

It holds the most powerful monopoly of all – the monopoly on violence.

It taxes you under the threat of violence.

It seizes your assets under the threat of violence.

It is the complete antithesis to the principle of voluntary exchange.