Taxing Ownership

California may put an extraordinary wealth tax before voters this fall. Under the proposal, anyone worth more than a billion dollars would see 5 percent of their wealth taken next year. Supporters cast it as a one-time measure targeting only the super-wealthy, yet that reassuring description may mislead voters. A state that enacts such a tax to fill its empty treasury will be tempted to do so again and even expand it when those coffers run dry. Meanwhile, California is not alone. Massachusetts Senator Elizabeth Warren has proposed a yearly federal wealth tax of 2 percent on fortunes above $50 million and 3 percent on those above $1 billion.

Friends of liberty should be worried by this novel means of raising money in the United States, even apart from the significant questions about their constitutionality. Wealth taxes fall even on productive, illiquid capital as if it were idle treasure rather than the dynamo of our economy. They would require a vast administrative apparatus to collect, while generating endless forms of legal tax avoidance. Today, by threatening the capital of wealthy innovators, wealth taxes also may endanger national security and even our longevity. AI is a public good essential to our military, as recent coverage in the New York Times acknowledges. Its knowledge spillovers also accelerate scientific discovery. And progress in AI benefits greatly from founders’ enterprises and venture capital, whose advantageous deployment will be most discouraged by such taxes. In short, wealth taxes are terrible not because redistribution is necessarily always wrong, but because they tax ownership rather than realized gains and fall especially hard on entrepreneurial and strategically important capital.

Classical liberal and commercial republics have generally not taxed ownership of productive assets. The economic growth they create helps maintain social peace. As the political philosopher Ernest Gellner observed, modern democracies rely on “sustained and perpetual growth” to avoid the dissension that comes from groups fighting over a static or shrinking pie. But the costs are not only economic. As I describe in my recent book, Why Democracy Needs the Rich, a free society depends not only on limits on government, but on independent centers of initiative and judgment outside the state. A tax on ownership weakens those centers and increases political control over all aspects of our lives.

Wealth taxes in America have traditionally targeted only land or housing. These assets, which are visible and easier to value than private businesses, are not sources of innovation. Because of these qualities, they do not substantially harm productivity or impose high administrative costs on collection.