The Legislative Landscape
The wave of wealth tax proposals started in California and has moved to Washington DC. What follows is a description of key proposals and my assessment.
California’s “One-Time” Lever: The 2026 Billionaire Tax Act
California is currently navigating a high-stakes local experiment, known as the 2026 Billionaire Tax Act, a proposed statewide ballot measure for November 2026 that would impose a one-time 5% excise tax on individuals with a net worth exceeding $1 billion.
The Retroactive Snapshot: The tax applies to individuals residing in California as of January 1, 2026. This retroactive “snapshot” is a deliberate attempt to prevent capital flight, though it has already sparked legal challenges and a notable exodus of ultra-high-net-worth residents prior to the deadline.
The Liquidity Compromise: Acknowledging the “Illiquidity Trap” mentioned earlier, the act allows billionaires to pay the 5% bill in annual installments of 1% over five years, though these deferrals come with a 7.5% annual charge.
Allocation: 90% of the projected $100 billion in revenue is earmarked for the Billionaire Tax Health Account to shore up Medi-Cal and public health services following federal funding shifts, with the remaining 10% designated for food assistance and K-14 education.
See my previous memo on the California initiative.
The Sanders-Khanna “Make Billionaires Pay Their Fair Share” Act
Introduced in March 2026, this is the most aggressive and direct redistribution model we have seen to date.
The Mechanism: A 5% annual wealth tax on net worth exceeding $1 billion.
The “Social Dividend”: Unlike previous versions, this bill specifically earmarks revenue to fund $3,000 direct annual payments to individuals in households earning $150,000 or less. For a family of four, this is effectively a $12,000 “wealth rebate.”
· Enforcement: To prevent a billionaire exodus, the bill includes a 60% “Exit Tax” on the total wealth of any billionaire who renounces their U.S. citizenship. Just like Hotel California, you can check out anytime you like, but we’re keeping more than half your luggage.
The Warren “Ultra-Millionaire Tax” Act
Senator Warren’s model remains the benchmark for “broad-base” wealth taxation, targeting the top 0.05% of households.
The Mechanism: A 2% annual tax on net worth between $50 million and $1 billion, with a surtax bringing the rate to 6% for everything above $1 billion.
Objective: The focus here is on structural social investment -- funding universal childcare, canceling student debt, and expanding Medicare—rather than direct cash transfers.
Auditing: The bill mandates a 30% minimum audit rate for the affected group and provides $100 billion in new funding for the IRS to develop specialized valuation tools.
The Biden “Billionaire Minimum Income Tax” (BMIT)
The Biden BMIT: A ‘Billionaire’ tax that somehow manages to find its way into the pockets of anyone with $100 million. Apparently, in D.C., ‘Billionaire’ is now a flexible term.
The BMIT is the most technically nuanced of the three, framed as an income tax expansion to survive potential 16th Amendment challenges in the Supreme Court.
The Mechanism: A 25% minimum tax on the “total income” of households worth over $100 million.
The Critical Pivot: It redefines “income” to include unrealized capital gains. If your stock portfolio grows by $100 million, you owe tax on that growth even if you haven’t sold a single share.
Prepayment Logic: This tax functions as a prepayment. When the asset is eventually sold, the taxpayer receives a credit for the BMIT already paid, effectively ending the “buy-borrow-die” strategy where the wealthy live off loans against untaxed assets.
Comments:
Comment One: Lack of liquidity and implications
· The 5% Cash Ceiling: According to the 2026 High-Net-Worth Asset Allocation Study, the average ultra-wealthy portfolio has compressed its cash and currency holdings to just 5% of net worth. This is driven by a “growth-first” shift into private equity and alternative assets (now 28-34% of total wealth).
· The Inherent Conflict: In a scenario like the proposed 5% annual Sanders tax, a billionaire with average liquidity would be forced to exhaust 100% of their available cash just to cover the first year’s tax bill.
· Forced Liquidation Spiral: Because “liquid” buffers are also required for operational costs -- such as interest on debt, capital calls for private ventures, and business reinvestment—any tax exceeding 1-2% of net worth would likely lead to the “fire sale” of core holdings.
· The “Paper Wealth” Paradox: Since over 50% of billionaire wealth is typically held in public equities (often concentrated founder shares), large-scale selling to meet tax obligations risks “market signaling” issues, potentially driving down the stock price and further eroding the tax base itself.
Lawmakers seem to think a billion-dollar valuation is a giant swimming pool of gold coins but you can’t pay a 5% tax bill with 5% of a factory’s roof or a fractional share of an unreleased AI algorithm.
Comment Two: The Constitutional “Apportionment” Wall
The primary legal hurdle is the 16th Amendment.
· The Direct Tax Conflict: The Constitution requires “direct taxes” to be apportioned by population. Because a wealth tax is a tax on ownership (not a transaction), it faces a likely Supreme Court strike-down. This creates “policy whiplash,” driving capital flight “just in case” the tax is enacted.
Comment Three: International Evidence (The European Exodus)
Europe has already run this experiment. In 1990, twelve European nations had wealth taxes; by 2026, almost all have been repealed (including France, Sweden, and Germany).
· The Revenue Paradox: France’s wealth tax reportedly raised €3.5 billion annually but cost the state €7 billion in lost VAT and income tax as 42,000 millionaires fled the country.
We’re desperately trying to import a European tax model that Europe itself has been frantically refunding and repealing for the last 30 years because their millionaires developed a sudden, passionate interest in moving to Switzerland.
Comment Four: The “Innovation Ceiling” (The Microsoft/Apple Test)
The most destructive impact is on the pre-revenue “Unicorn” phase.
· The Cost of Capital: A 5% wealth tax acts as a 5% “interest rate” on equity, raising the hurdle rate for every dollar of startup investment.
· Stifling the Future: If you had taxed Microsoft or Apple at 5% of their paper valuation the moment they hit $1 billion -- long before they were profitable -- the capital siphoned away would have drastically slowed the infrastructure they built. For today’s AI startups, this is a “penalty for success” that incentivizes selling out to incumbents just to pay the IRS.
Comment Five: The Philanthropy Paradox
By taxing wealth out of existence, the state effectively dismantles the engine of private philanthropy, replacing surgical, long-term capital with the broad, often inefficient spending of a centralized bureaucracy.
The Gilded Age: Giving “Everything” Away
The tradition of radical distribution is a fundamental pillar of American capital. In the early 20th century, the titans of industry shifted from accumulation to near-total liquidation for the public good:
· Andrew Carnegie: Living by the mantra, “The man who dies rich, dies disgraced,” Carnegie distributed over 90% of his fortune (nearly $14 billion in today’s dollars). His wealth built over 2,500 libraries and anchored institutions like Carnegie Mellon that still drive innovation a century later.
· The Rockefeller Legacy: John D. Rockefeller distributed over $500 million—creating the modern school of public health. When wealth is taxed at the source, the “seed corn” for these multi-generational engines is consumed before it can ever be planted.
Interesting video on the Gilded Age:
https://daily.jstor.org/philanthropy-and-the-gilded-age/
Modern “Philanthro-Capitalism”
Today’s ultra-wealthy continue this tradition, though with a focus on systemic “moonshots” that political cycles often ignore:
· The Gates & Buffett Pledges: Warren Buffett has committed 99% of his wealth to be distributed during his lifetime or at death. The Gates Foundation has used this concentrated capital to move the needle on global polio eradication—a feat of logistics and funding the public sector struggled to maintain.
· The San Francisco Impact: Mark Zuckerberg and Priscilla Chan have mirrored this with the Chan Zuckerberg Initiative, pledging 99% of their Meta shares. Locally, they provided a $75 million gift—the largest private gift to a public hospital in U.S. history—to San Francisco General, funding the critical trauma technology and seismic upgrades that tax bonds alone couldn’t cover.
So, the progressives who want a wealth tax to fund their vision of government are willing to sacrifice these projects. The tradeoff exists for two reasons. First, the money reallocated to government projects can’t be given to philanthropic projects. Second and arguably more importantly, taxes that reduce capital accumulation and economic growth will impede the existence of fortunes available for any purpose.
Conclusion: The Collision of Populism and Pragmatism
The three federal frameworks and the California initiative analyzed in this memo represent a significant shift in the American fiscal narrative—moving from taxing what citizens earn to taxing what they build. While the political appeal of a “Social Dividend” is undeniable in an era of high wealth concentration, the structural impediments outlined in our six comments suggest a profound disconnect between legislative intent and economic reality.
My cynicism regarding the practicality of these proposals is rooted not in ideology, but in the mechanical failures inherent to taxing illiquid, unrealized value.
The evidence from the European exodus and the “Innovation Ceiling” suggests that a wealth tax does not simply redistribute static piles of gold. Instead, it siphons the very capital required for high-risk, long-term R&D. If we mandate the extraction of capital from the frontier to pay for the present, we stop the next Microsoft, Apple, or SpaceX before they can reach maturity.
Subsequent essays will look essay on the likely concrete impacts of these wealth tax proposals on capital formation and economic growth.