The wealth tax is the ultimate zombie policy: It’s been tried, tested, and rejected across Europe, yet it has returned to the United States with renewed fervor, driven by the politics of envy disguised as justice. In some ways it’s a predictable response to out-of-control state budgets fueled by reckless spending at all levels of government and growing budget deficits.
Most recently, Washington State’s House passed a 9.9% tax on income over $1 million, and it is expected to be signed into law by the governor any day now. Governor Bob Ferguson argues that this will restore fairness and equality to working- and middle-class families. Up to this point, Washington State had not had any income tax. California was the first state to make this move in 2004, followed by New Jersey, New York, Minnesota, and Massachusetts. Washington, D.C., also imposes a high-earner bracket tax on millionaires. Maryland enacted a temporary 2008 wealth tax that expired in 2010, but it’s considering another. That tax was projected to bring in over $100 million, but Maryland soon realized that the number of people reporting incomes of one million dollars or more dropped precipitously. People respond to incentives, and Marylanders had been incentivized to avoid the new tax.
Taxes have existed for almost the entire history of organized civilization and can be found recorded on Sumerian tablets dating back to 2500 BC, which describe the payment as a “burden.” Hatred for taxes goes back just as far. To avoid poll taxes, labor taxes, merchant taxes, and duties, all of which were paid in kind (think livestock, beer, and grain) before the advent of coined money, ancient records show that people engaged in smuggling. They created fake sales records and bribed guards at city gates—anything to lower the tax burden. Today Americans widely hate taxes; two-thirds report that their taxes are too high and that they don’t get good value in return, calling them unfair. About half of those surveyed report preferring lower taxes, even if that meant fewer government services.
Attitudes toward the wealth tax are slightly different because, while most people hate their own tax burden, they also do not consider themselves rich, despite growing evidence to the contrary. According to Federal Reserve data, the average net worth of American households has passed the $1 million mark, rising 42% between 2019 and 2022. Another study found that, when measured in 1995 dollars, the number of millionaire households grew from 2.4 million in 1983 to 9.1 million in 2016; in other words, the number of millionaires tripled during that time. This does not mean that people are earning a million dollars per year in their salary but that their net worth is pushing them into millionaire status, still a good thing. Despite this, a recent study found that just 36% of those with $1 million in investable assets consider themselves wealthy. Moreover, another survey found that $2.3 million is the amount needed to feel wealthy. Americans are richer than they think but are rightly frustrated with how the government spends their money and often view the system as rigged, with favors and benefits for the wealthy.
The disconnect here is important, and many factors influence why people don’t feel rich despite what the numbers on paper may reveal, including their expectations about the economy, which is often tied to political debates, general perceptions about affordability, and expectations about their longevity. Life expectancy is growing, which is a great thing, but that means we need more in our retirement accounts and sound planning as we age, especially since Social Security and Medicare are on a collision course with insolvency. Americans are rightly frustrated with federal and state spending; they are also frustrated that their taxes don’t really do much for them.
Despite all this, Americans are divided almost fifty-fifty on wealth taxes for the rich, and while support for them has grown over the past eight decades, that support has varied; today, a slight majority prefers higher wealth taxes. Predictably, the divergence of opinion varies by political partisanship. Eighty percent of Democrats or Democratic-leaning independents want higher wealth taxes, compared with about a quarter of their Republican counterparts. Another survey showed that two-thirds believed that billionaires were not taxed enough.
The good news? A recent Pew poll showed that only 18% of Americans believe that being a billionaire is morally wrong. The truth is that Americans are a bit schizophrenic in their views of the wealthy, but most everyone would love to be a billionaire and believes that, if they were, they would have earned their money morally. The American Dream is alive and well, but there is disdain for perceived concentrations of wealth and the political influence it affords.
But public opinion, however divided, does not tell us whether wealth taxes actually work, and this is where the economic way of thinking becomes important. Let’s first start with the principles. The wealth tax is only relevant in a fixed-pie world. If we view the economy as a fixed set of stuff and income, then matters of inequality jump to the forefront because we face a battle over who gets the stuff. In a fixed-pie world, the weak lose and the strong take, and history bears that out consistently. But if we’ve learned anything over the past 250 years, it should be that the economy is not a fixed pie. Milton Friedman argues that the fixed pie fallacy is one of the most pernicious; it invites envy disguised as policy and spurs other economic fallacies.
Just this past month we celebrated the 250th anniversary of the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations. Imagine arguing in 1776 that universal opulence would “extend itself to the lowest ranks of people,” but that achieving it required unleashing human creativity through the division of labor and a well-governed society. The reason we do not have a fixed economic pie in the United States is that we built those institutions, and the results are astounding. In 1776, life expectancy hovered around age 38, largely driven by infant and child mortality. Average incomes in the colonies were low by today’s standards yet still highest in the world at the time. Today the U.S. median income is the highest in the world and we’ve reduced child and infant mortality by 90% in the last century alone. Smith was right: Limited government and private property rights produce personal and societal wealth, turning a zero-sum scramble over a fixed pie into a positive-sum society. A market-based order grounded in the rule of law is, at its core, egalitarian, which is why Smith believed that everyone, not just the powerful, could experience wealth.
It is precisely the deviations from those institutions of economic freedom that distort markets, create winners and losers, and lead to bloated and ineffective government and cronyism, causing resentment and suspicions about the wealthy. In a free market you must look beyond your own interests and create value for others to earn a profit. The evidence bears this out, and while the U.S. does have a problem with cronyism, such as no-bid contracts that dominate the military industrial complex, subsidies, bailouts, and occupational licensing barriers, to name a few, American wealth is mostly a story of entrepreneurs who have created value for society far greater than their net worth. Innovators capture only about 2% of the social value they create; in other words, the social benefits far outweigh the private gains. Taxing that 2% further only reduces incentives to create entrepreneurial value. Less cronyism would mean even more growth and less structural inequality.
Now let’s do a little cost-benefit analysis. For the 52% of Americans who support the wealth tax, does it work? Not as its supporters would hope. It causes several problems, including capital flight, reduced investment, and slower growth; it cannot close the budget gap; and it yields unintended consequences borne by the middle and working classes.
The wealth tax creates incentives for those who cross the income threshold to avoid it whenever possible. Remember that our ancestors smuggled cattle to avoid taxes; millionaires and billionaires will do what they can to minimize the burden. In many cases this means they will move out of the state and relocate to a more attractive tax regime. This is federalism in action, or voting with your feet, and it leads to capital flight.
The wealthy leave high-tax states and take their net worth and, in many cases, their businesses with them. While there is debate about how much capital flight will occur, it happens, and you can guess where it goes—lower-tax-burden states. Former Starbucks CEO Howard Schultz is leaving Washington State for Florida and taking his investments with him. According to IRS data, red states gained $37 billion in income and almost half a million new filers, while blue states lost $41 billion in income. States losing the most are California, New York, Illinois, Massachusetts, and New Jersey. Illinois is the lone holdout without a wealth tax, but not to worry, it’s considering one, including a tax on unrealized gains.
The Hoover Institution reports that six billionaires have already left California, taking $536 billion in net worth with them. New York is following suit. Shark Tank’s billionaire Kevin O’Leary remarks that New York City’s mayor, Zohran Mamdani, will win “Real Estate Agent of the Year” in Florida, which, so far, has gained $21 billion in income for the state with its attractive tax regime and balanced state budget.
Mamdani, who said billionaires should not exist, ran his entire campaign on taxing the rich as a matter of equity and fairness—the Robin Hood platform. If the governor of New York, Kathy Hochul, does not comply with his calls for a wealth tax, he will impose a 9.5% property tax and a 50% inheritance tax, with the exemption threshold lowered from $7 million to $750,000. Apparently, wealth taxes aren’t just for the wealthy. This is all after unveiling a $127 billion budget, which is larger than any U.S. state’s and larger than the budgets of Portugal, Greece, and New Zealand. Meanwhile, Hochul, in 2022, told New Yorkers who didn’t align with her spending priorities to “jump on a bus and head to Florida, where you belong” because “you do not represent our values. You are not New Yorkers.” Copy that, except I doubt they rode the bus. Now she is begging them to return from Palm Beachbecause she refuses to stop spending. It’s like living in a Seinfeld episode.
Simply put: The wealth tax cannot close the budget gap, primarily because of the capital flight but also because many of the states advocating such taxes are spending like drunk sailors on holiday. The numbers do not add up. This is true at the federal level also. As economist Jessica Riedl has shown, wealthy Americans already pay effective tax rates comparable to those in Europe, and even a 100% tax on their income would close neither the federal nor the state budget gaps. The problem is persistent spending, but these states refuse to stop spending, and that’s where the unintended consequences take hold.
Tax avoidance and capital flight lead to reduced investment and lower economic growth. The consequences don’t stop with the wealthy; fewer jobs, less investment, and declining economic dynamism hit the middle and working classes hardest, leaving them with shrinking opportunities. Pair that with reckless spending and the tax burden will become even more regressive as states scramble to fund their budgets and the affordability crisis faced by ordinary families deepens.
Moreover, you aren’t really reducing inequality if you’re merely running high-net-worth individuals out of town; they’re still rich but occupy a new zip code, and now they’ve taken economic opportunity with them. The wealth tax may feel morally right, but it’s morally and economically wrong. If the wealthy have earned their income through value creation, using the government to redistribute that money for those who have not earned it does not create productive incentives for more innovation—it reduces them. If those who are wealthy have not earned their incomes by serving others in the market, the way to stop that is not through redistribution but by ending systemic inequality through political privilege. The wealth tax is not limited to punishing the wealthy but also to eroding state tax bases and shifting those burdens onto those who cannot afford to leave.
Adam Smith understood that wealth is not divided but multiplied, and that unleashing human creativity through limited government and sound property rights would extend it to everyone. The wealth tax is the antithesis of this and will be the final nail in the coffin of productivity, entrepreneurship, jobs, and prosperity. That’s why the wealth tax must die before it kills any more state economies.
