Budget Expert Criticizes California Billionaires Tax Amid ‘Craziness’ Storm
California’s proposed wealth tax is facing significant backlash from some of the state’s wealthiest individuals. Governor Gavin Newsom, who is familiar with financial struggles himself, finds himself at odds with these billionaires. Prominent figures like Anduril founder Palmer Luckey, along with tech moguls Larry Page and Sergey Brin, have expressed their opposition to the policy.
Critique from Budget Expert Kent Smetters
Budget expert Kent Smetters, a professor at the Wharton School and director of the Penn Wharton Budget Model (PWBM), has voiced skepticism regarding the viability of California’s wealth tax. Speaking to El-Balad, Smetters described it as an ineffective revenue generator, arguing that it is born from what he calls a “perfect storm of craziness” in today’s economic and social landscape.
Smetters stated that the wealth tax would likely fail to deliver the anticipated financial benefits as California grapples with substantial budget deficits. He attributes this failure to behavioral economics and the concept of “money illusion,” which can distort public perception about wealth.
Historical Context of Wealth Taxes
According to Smetters, wealth taxes have a poor track record of meeting revenue expectations. He notes that many countries have abandoned such taxes due to disappointing financial returns. Historical examples include:
- Austia (1994)
- Denmark (1997)
- Germany (1997)
- France (2018)
As of June 2024, only four OECD countries have a wealth tax. The United States currently has no wealth tax in place, and its potential constitutionality remains uncertain.
The Economic Impact of Wealth Taxes
Research from the PWBM indicates that wealth taxes often generate revenue below 0.3% of GDP. Administrative costs, especially those related to asset valuation and tax avoidance, further complicate the matter. Most countries that repealed wealth taxes did so permanently, with France being a noted exception that switched from a general tax to a more specific real estate tax.
Smetters illustrated the limited revenue potential of wealth taxation by calculating that if the federal government confiscated every dollar above $999 million from individuals, it would only fund government operations for approximately seven to eight months.
Alternative Tax Strategies
Instead of implementing a wealth tax or increasing income taxes, Smetters advocates for broader tax participation. He suggests that California consider stable, broad-based revenue sources. Options like a large sales tax or a value-added tax (VAT) could provide more sustainable financial support.
He warns that without such reforms, California’s reliance on a progressive and volatile tax system will leave it vulnerable to fluctuations in the economy. Critics of Smetters argue that his analysis tends to overstate the negative impact of deficits while minimizing the benefits of public investment.
Understanding Public Sentiment
Amid rising anxieties regarding job displacement due to artificial intelligence, there has been a growing push for policies targeting the ultra-wealthy. Smetters emphasized that the perception around AI’s impact on job security often exacerbates public fears. He believes that AI should be viewed as a “labor-augmenting” tool rather than a job eliminator.
He also highlighted a common misunderstanding regarding the progressivity of the U.S. tax system. Many citizens are unaware of how disproportionately taxes are levied on the wealthy compared to the rest of the population. This gap in knowledge contributes to the broader conversation around tax reform and wealth redistribution.
Conclusion
As California contemplates its fiscal future, the debates surrounding wealth taxes underscore the complexities of economic policy. The discussions led by experts like Kent Smetters illustrate the challenges of balancing progressive taxation with practical revenue generation. As pressures mount from various stakeholders, a careful reassessment of tax structures may be essential for California’s financial stability.
