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This is the Human Action Podcast where we debunk the economic, political and even cultural myths of the days.
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Here's your host, Dr. Bob Murphy, everybody. Welcome back to the Human Action Podcast. Today I'm going to be spending some time on the proposed. It's on a. It's a ballot initiative that they're gaining signatures for just to try to get it on the ballot in California. A wealth tax on billionaires. Right, so that's the topic. But before we dive in, a quick Note. This Sunday, February 22nd, is going to mark the 20 years since the Mises Institute has launched its YouTube channel, Mises Media. So it started back in 2006, and at that time it was just a way to put our lectures and conference talks online for anyone who couldn't be there in person. And since then, it's grown into a library of more than 3,000 videos with over 35 million views. And that includes our documentaries, archive talks, interviews, and of course, all the podcasts, including this one, the Human Action Podcast. So if you've never spent time going through the archive, it's really worth it. And if you'd like to help support the work, you can donate to celebrate the 20 year anniversary. So if you donate $30 or more, then the Mises Institute will send you a free physical copy of Hunter Lewis's Crony Capitalism in America. Okay, let's get into the topic. So the news or the, yeah, I guess the news hook here or the context is. And I, I want to credit, before I forget, Dan McCarthy is the one who, you know, put this on my radar because he, he had written an op ed, I interviewed him on a, on a separate outlet on this topic. And I just started digging more into it that the, it was introduced in late November or, sorry, late 2025. A ballot initiative for the 2026 election in California that I've got the notes in front of me here. It's initiative number 25 0024. And what it is, it's a 5% wealth tax levied on billionaires in the state of California. Okay. So the, you know, if you ask the proponents of it, like, what are you doing this for? It's the, in their own words, it's applicable to about 200 people and who collectively have a net worth of something like $2 trillion. You know, in terms of the way that these things are calculated for purposes of this referendum and so that, you know, you do the simple arithmetic, that would raise about $100 billion and they're going to devote it to healthcare and things like that for California employees. So just one little quibble in case, you know, you're like me and you're wondering, well, geez, that's kind of a weird incentive structure. Like what if somebody is worth $999 million, that means they don't get taxed at all. And then if they, if their net worth goes up 1 million more, all of a sudden they get 5% of their wealth taken. That's kind of a big ramp up. So strictly speaking, the way the thing is structured, it's phased in that if your net worth is, you know, starting at 1.0, then they start levying a small amount and then up to it rises linearly and so you don't get the full 5% applied to the whole amount until your NET worth is 1.1 billion. Okay, so it ramps up. So the idea is the flat 5% is really only levied on people who are worth 1.1 billion or more to try to deal with that, you know, sort of cliffhanger effect incident. I've seen people say apparently right now there's only one person in California whose net worth is exactly in between those two goal posts. So it's kind of a moot point. But anyway, I was curious about that and, and I looked it up and I thought I'd share it with you folks too because we got some, some pretty attentive people to detail here listening to Mises Institute stuff. Okay, so that's the, the you know, where, what the structure of it is. And so let's comment on that. So one thing is, and what I'm going to try to give you guys in this episode is are some empirical evidence showing the impact of taxes and just more broadly speaking, you know, state regulations and how that affects population flows. And that might seem ironic to you that well, geez, you know, we don't like taxes. But I actually, I've noticed in the Austro libertarian universe, perhaps precisely because there is such a, you know, moral ideological revulsion at taxation per se. Right. Taxes or theft, you know, in a, in a Rothbardian framework that some of the more call it like supply side perspective on the incentive effects of taxes, I sometimes think are downplayed. Right. You know, partly, maybe just as product differentiation that, oh, it's those, you know, Arthur Laffer Chicago School kind of guys, supply siders that focus on the incentive effect. Whereas here, you know, it doesn't matter whether tax revenue goes up or down. You know, taxes are bad, period. Let's not get hung up in doing regression Analysis, So I understand that element, but still, nonetheless, I think that runs the risk of perhaps lulling you into thinking that the incentive effects aren't as big as you might believe they are. So anyway, here, let me just go through some of this stuff at the outset. Let me go through some of, like the, the theory, and then we'll dive into some of these numbers that again, may surprise you in terms of just the impact of this stuff. Okay, so big picture, it's pretty standard in economics to rate taxes in terms of the, the impact it has. It's what's called deadweight loss. Right, Right. So one way of putting it is if the government is going to raise whatever, a trillion dollars a year in revenue from the country, there's more and less destructive ways of doing that. So again, it's, and you can see the slippery slope here. When you start getting this analysis, it almost leads people to think like, oh, so long as they extract that trillion dollars in the least painful way, then it's okay. And yeah, we're not saying that as libertarians for sure, but, but still, I don't think, you know, we should just ignore this kind of analysis. And so one of the main, or a standard point is to say that in general, a consumption tax causes less economic distortion than an income tax. And so let me just run you through the logic of that. The idea is if the government is going to raise revenue, and it, in the way that the tax is actually framed and implemented and applied, is to say anything that you spend on what could be classified as consumption, you know, will get taxed at a certain rate. And then they try to estimate, okay, once we impose this tax, let everybody react to it, and then in the new equilibrium, how much total consumption spending is there? We multiply that by the consumption tax rate and that's how much revenue the government raises. Right? So you could do that versus a different approach. If you're taxing income, let's just say it's one rate for simplicity. And then you would say, okay, and with all this stuff, again, to do it properly, you got to say, once we implement the tax, let everybody readjust and optimize. Then in the new equilibrium, you go ahead and do the multiplication, right? You gotta let people react to it if you're doing it properly to make it real world. And so then you would say, okay, if instead of we do an income tax again to raise that. Right. The desired target revenue, what rate does it have to be such that once everybody reacts to this tax structure, now the resulting income of Everybody multiplied by the tax rate gives the target revenue. Right? That's the way, that's the way you would do this analysis. That's what I, what I mean here, when I'm going to, you know, be sort of glibly talking about tax and consumption versus income, you want to keep it apples to apples. Okay, so in that spirit, then, if that's what we're doing, the reason economists in general think that taxing consumption makes more sense is that they would agree that's still going to distort things. Right? And Murray Rothbard, like in Man, Economy and State and some of his other works, goes through analyzing all the different tax types and shows that no matter what you do, it's going to distort economic decisions and lead to what mainstream economists called deadweight loss. So there's no way around it. So don't misconstrue this as me saying consumption taxes are efficient or good or anything like that. That's not what I'm saying. But it's just terms of they're less bad than income taxes in this particular dimension. And so specifically it reduces your incentive to generate income. Right. Even though you might think, oh, but it's taxing consumption. But. Right, but what's, what's the point of generating income? It's ultimately to consume. Even if you're going to generate income and save 98% of it to give to your heirs, well, why do you want to give a bunch of assets to your children or your grandkids or, you know, foundations that you want to donate to? It's because they're going to ultimately spend it on consumption. Right? The whole point, economically speaking, of generating income, even saving and investing whatever is long run consumption. Okay? And so the point is, if there's a consumption tax levied so that at any point in time you're getting hit and so that, geez, if you spend $100, let's say that the tax rate is 5%, that if you spend $100 on consumption, oops, the government's going to take $5 of it. So you really only get 95 on the margin that's reducing the benefit to you or you know, to your kids or grandkids or charitable foundations or whatever, if the tax applies to them, of, of having that command over economic resources. Right? And so for all of the reasons, when you're making your decision about how many hours do I want to work or do I want to start a business, or if I'm picking two different occupations and one of them involves me, Driving into the big city, fighting traffic and I got to go in this skyscraper and it's hectic and people are yelling at me and I got to deal with these alpha males and da, da, da, da. But I earn $300,000 a year. Or I could go work at my local library. The commute's real simple and I just look at school kids coming in and checking out books and whatever and it's real easy. But I only earn 60,000 doing that. Those types of decisions are all ultimately impacted by, if you're, you know, a rational, forward looking agent in these models and you say, well, geez, if consumption's being taxed at whatever 5%, that reduces on the margin the benefit to me of trading my leisure time for income. Or even if, if you're working 40 hours a week in the big city versus at the local library. So the leisure is the same, but just the stress, you know, like taking on the additional stress of the one job versus the other. Okay, so all those decisions clearly are impacted by the consumption tax rate right in the limit. If they levied 100% consumption tax, then there would be no point in working unless you just directly got utility from, you know, producing things. But you see, you see the point there. Instrumentally, there's no point in earning an income if there's 100% consumption tax. And again, I want to be clear, this isn't a selfish thing. Even if your whole point is to build up a huge nest egg and then hand it off to your kids right before you die, if your kids are going to be taxed at 100% of consumption, then that's no benefit to them. Okay, all right, so you see that. So again, a consumption tax does distort economic decisions. It makes people work less, it makes them generate less income than they otherwise would have. That's true. Okay, and specifically the part of the issue is, because typically the way a consumption tax is levied, if you, quote, consume your leisure, that doesn't get taxed. Another application would be like, if you live out in the woods and you have all this, you know, you own all this, you know, forest land that's, you know, nice, and there's, you know, creatures and everything. It's very pretty. And you're considering, oh, should I bring in like outside logging companies or should I, you know, clear cut the thing and put up, put in a shopping mall? You know, there's all kinds of ways you could take the raw, original nature and then transform it in a way that generates a money income. And so Even just a consumption tax will weaken your incentive to do that. Because again, the whole point of bringing in the timber companies and whatever is that they're going to pay you an income. And why do you want to earn income rather than just enjoying looking around at the spotted owls in your backyard and stuff is that, oh, because I can take the money that they, the timber company pays me for the logging rights and then I can spend it on stuff or I can give it to my kids or whatever. Okay, So I just keep coming back to it's not just your labor leisure trade off, but any kind of natural resources you have that there is an ability technologically to transform it into something that generates a money income, a standard consumption tax will deaden the incentive to do that. And that's the sense in which economists would say a consumption tax distorts those decisions on the margin and leads to what's called deadweight loss that less is being produced. You know, that for all of society's natural resources that it starts out with, including the, your potential for labor that you could either devote to leisure or turn it into labor, a consumption tax weakens that incentive. Okay? And so it, it leaves congealed possibilities untapped. Okay, but the point is in income tax is worse because an income tax has that same problem, right? The all the different, all the examples I just went through in terms of what a consumption tax would hurt, you can see why an income tax also, like if you're getting wages for your labor, you know, you could go in the big city and earn 300,000 or you could go to the local library and only earn 60. Obviously if, if you're late, if your income is being taxed, well then that distorts that decision and makes the library look more attractive on the margin because you don't get to keep the full 300,000. Right. So there's that element. Same thing with, you know, taking your raw forest lane and turning it into a shopping center or whatever, that's distorted. If the income you would get from the logging company or the, the stores that would locate inside your mall, if that's income's being taxed, clearly. But then on top of that, it also distorts the consumption saving trade off. Right? So given that you earn an income and then it gets taxed, and now, you know, let's say you earn gross 300,000 and there's a 10% tax and so you pay 30,000 in income tax and I got 270,000 left, you could consume it all right now. And if we're in an income tax regime. That's it. The 270,000 that you spend on consumption doesn't get taxed. But if you save whatever, 10% of it either by like putting it in a bank and you're getting paid, you know, a paltry interest rate, or you invest it in companies and you hope to get capital gains or dividends, or you lend it out to some other entity that pays you explicit interest. Most income taxes, the way the law is written and it's applied is those, you know, dividends and interest and capital gains, when they're realized, also get taxed because that's considered income. And that's correct. That's not wrong. Like, that is income in an accounting sense. Okay? Economically speaking, that's income. And so, yeah, if you're taxing income, that stuff gets taxed too. But then, so notice with an income tax, it's not just your decision as to should I trade my leisure for labor or what kind of labor should I engage in, or, you know, my natural resources, should I deploy them in a productive enterprise or just kind of sit and enjoy the raw nature. It's not just that, but also when I then generate an income, do I consume it all now or do I save some of it, defer some of it to the future? That also is getting whacked. Whereas with a consumption tax, just to make sure you're getting the point, that extra whammy doesn't happen. With a consumption tax, if whenever you buy the consumption, it's just taxed at that same rate, well, then, you know, if you get, if you earn an income now, if you save it, it's not originally being taxed when you earned it, it's only being taxed when you saved it. And so if like somebody's going to pay you a 10% interest rate if you lend them money now, you're effectively your after tax consumption is still 10% higher if you're willing to wait for a year. Right? It's the consumption in each period is still lower than it would have been with no taxes. But with a consumption tax, the intertemporal trade off the benefit of deferring and then, you know, earning the interest, that proportional increase is still the same. Right. The consumption tax levied in each period doesn't change how much your consumption grows based on, you know, interest or dividends. Okay? And so that's the sense in which mainstream economists say, and a consumption tax is more economically destructive than an income tax. Okay? Okay. So I think I spent a lot of Time on that. I'll move now more quickly through the stuff. But in that framework then I'll just be quick on this point. A wealth tax is way more destructive, right? I mean, if it's just a one time thing and you think that's what it's going to be, okay, like nobody can really do anything about that. But the idea is if you think there's even a chance that they're going to come back to the well and hit it again. And I think in California, if they, if they pass this, do you really think five years from now, if they're in another fiscal situation, they're not going to come back and tax people or they're not going to widen it and say, well, gee, what about somebody who's worth 800 million, right? Like, oh, here and that money fair and square, that's it. Like, no, why wouldn't you tax somebody worth 800 million if you think it's okay to tax someone worth a billion? Okay, so the idea is, you know, when you think through and you understand, I hope the argument I just walked you through as to why economic decisions on the margin get distorted more with an income tax than a consumption tax. Now imagine what you're realizing is, oh, if you carry property or wealth forward, that just keeps getting slammed. Well then in terms of the marginal analysis, you have a big incentive to consume everything right now, or as we're going to talk now more in a minute here, to get your assets out of that jurisdiction to escape that, you know, that siphon. Okay, so I again, I just want to stress that like taxing wealth per se as opposed to taxing income is incredibly destructive. Okay, so let me just run you through some anecdotes here, like just to give you a flavor of the impact these sort of abstract theoretical considerations can have. All right, so if you just get a list here, let's go through it. So these are prominent California people who are originally California based billionaires who have, you know, moved out and or like relocated their businesses and things out of California, many of whom said explicitly, you know, because of this recent discussion, some of it's been more long term. So you got Mark Zuckerberg, Larry Page and Sergey Brin of Google, Peter Thiel and Elon Musk, just to name a few. Okay, so these are all high profile people that have, have left the state, you might say. All right, fine, fair enough. Here, let me read you these statistics. So this is, this is a cumulative from July 2020 through July 2024. And what these figures I'M going to show you, they're called, it's net domestic migration. So what that means is you say at the beginning of the period, people who are already in the United States and are just moving in between the states, that's the groups that we're considering. Okay. So in particular, we're not counting if foreigners like flow into California through immigration, whether legal or illegal. We're not counting that. We're just saying of the people who at the start of the analysis were already in the, you know, in California who left and of the people who were just relocating from the 49 other states who might have moved into California, that's what we're doing, right, because we're trying to, if you're just looking at the gross population flows, California looks better because they have so much outside, you know, people coming in. Whereas to try to isolate, once you're in the United States, where do you want to be? That's, that's the point of focusing on the domestic migration patterns. Okay, so with that understanding of these are these numbers again from the period July 2020 through July 2024, the top two states, you know, recipients of incoming people on net. Florida was number one. They gained 810,000 people on net. Texas was number two. They gained 694,000 people on net. The bottom two states, 49th was New York. They lost 894,000 people total. You know, cumulative over that period in California was dead last. They lost 1,398,000 people over that four year stretch. Okay, so you can see how, you know, there, it's not ambiguous. Those, those trends are pretty clear. And also we'll flash up at the screen here, you can see sort of this heat map is, is a fraction of the, of the original population too. Right. So it's, it's not merely in, in the, they're, you know, the purple means they're, they're shedding a higher fraction and the green means they're, you know, attracting it. Okay, so the, you can just look at that and you can see the purple is concentrated in California, in New York and the green is concentrated in Texas and Florida. Also there's some places in the Northwest that are network attracting people. But again, you can see there, it's, that's not absolute numbers, right? Because the ones I read to you before, which were absolute numbers, you might have thought, okay, yeah, sure. But I mean, come on, New York and California have the most people in Texas and Florida are big. So they're going to be magnets. And maybe it's misleading. But again, even if you adjust and say as a percentage of the population from the initial start period, that pattern is still there. Where the, you know, the biggest exodus is, are from New York and California. Okay. So, you know, we have that, those statistics. Let me now shed some further light in terms of those patterns and you know, why taxation might matter if you rank the states in terms of the state level personal income tax. Right. So, you know, not just the federal, but the states also levy personal income taxes. Some of them, the highest as of right now is California, that's got a 13.3% top marginal rate. Hawaii happens to be number two. And then New York is number three at 10.9%. In contrast, Florida and Texas don't tax personal income at all. Okay. So again, when, you know, high net worth individuals, business owners and such particularly, and I know some people, this was the case that they lived in California, I know some people in, you know, Massachusetts as well. If they were getting ready, like if you're going to sell, if you know you're going to sell your business that you founded or you just know there's some event that's pending that means you're going to have a big jump in income and they will literally leave the state, you know, like for some people that can save them millions of dollars in tax. And would you. So I'm partly saying this because I think some people, you know, you're a middle class person, you grew up in an area, all your friends there, your kids are in high school, you might think, ah, if the legislature of my state raises the personal income tax by 2 percentage points, I'm not going to move out of the state for that. Right. You might not, but there are people that, that does make a lot of difference and they would. And especially if you look over a longer term and especially if it's a pattern. So that's one point I want to make here. Before I forget, Even if this initiative, this ballot initiative doesn't get enough signatures, just the fact that this was floated, you know, people considering moving to California and starting a business, they would think twice about that. Right. Why would you do that? Just the fact this was even under consideration, even if it doesn't go through. Okay. And let me just spell out something because here's another point that I didn't fully think through. I actually saw Arthur Laffer in some of his work spelled this out. And the idea is once the, the baseline level of income taxation, for example, gets above a certain point on the margin, the, the changes in that rate have a much higher impact on the after tax return than you might have thought. Okay, so let me just give you this specifics here. You see what I'm talking about? Okay, so let's say you're a high income earner and you know, you're in California right now and you're thinking about moving to Florida or Texas. So right now the top federal income tax rate is 37%. And so then if you add on California's rate, and here I know historically there was like the salt deductions and things, but then, you know, with the Trump revisions, you know, if there's a standard deduction that gets washed out. So in any event, just go with me on this one. I realize there's nuances, but I just want to make this basic point in terms of the arithmetic. So let's assume that you're going to have both the federal and the state hitting a certain portion of your income. So what that means is the combined, you know, the total rate, if you're In California, it's 37% plus the 13.3. Right. So that's 50.3. Right. That's your combined income tax rate, the federal and state. And there could also be local ones too, we'll neglect that. Whereas if you go to a zero income tax state, then it's just the federal rates. 37. Okay, so with that you might think, oh, okay, so on the margin you're saving 13 percentage points, you know, for rich people, sure. But on the other hand, they're loaded, what do they care? But it's actually that's not the right way to think about it in terms of the economic incentives. Because really what you care about is your after tax return. And so the way to think about it is on the margin, if you're going to generate an extra $100 in pre tax income, if you stay in California, you're only getting to keep $49.70 at that combined tax rate, you know, 50.3. Whereas if you move to Florida, Texas, you get to keep 63%. Okay, so viewed in that way, in particular, like if you're thinking about like deploying investments, like, you know, you've got some financial capital, you want to deploy it somewhere and then you say, oh, here, you know, if I generate $100 in gross return, I get to keep this 49.7 versus 63. If you think of it that way, your rate of return is 27% more if you go to Texas or Florida. Right. That you're, in other words, to get to get to keep 63 instead of keeping 49.7, that I'm saying $63 is 27% more than $49.70. Okay. So that's the sense in which again, if you're gonna, if you earn a hundred dollars an hour, okay, that's, that's the way to think about that. You're earning In a sense 27% more on the margin if you're being taxed at 13.3 percentage points lower, less. Okay. Even though you might have not realized there's that. So it almost like effectively doubles it if you think of it in those terms. Okay. So again, when you're actually considering the perspective of a high net worth individual or a business founder or something, even something that to you might not seem like it's that big a deal, can have an enormous after tax impact on the incentives, which is the whole reason, you know, you're founding a business or whatever, or at least part of it is, you know, yeah, I'm doing this because it's, if it, if it hits, I'm going to make a lot of money. Well, tax, tax structures affect that greatly. Okay. So I just, you know, wanted to run through that stuff. I thought it would be interesting for you folks. Again, I'm sure the idea of me saying state level policies matter and affect population flows isn't shocking, but you may have been surprised at the magnitude of some of those numbers. And also I'll say it's not purely tax issues. Also, what happened like during COVID Okay. And the reason I picked, I wasn't cherry picking those numbers. It's just I had a, a study that showed, you know, the July 2020 through 2024. That's why I grabbed that. I tried to look the. Some of the stats aren't available for 2025 yet. So that's why I couldn't expand it to 2025. But looking at like the preliminary, I think those trends, they're still there, but not as extreme. In other words, I believe in 2025, the biggest gaming states, it wasn't Florida. Like, so Florida's gain had slowed down somewhat, but still, you know, those trends are in place. So my point being, yes, Covid, I think drove a lot of this stuff in the particular time period I grabbed. But even if you look longer term, I think those basic patterns are still there. And again, you know, with Mandani coming into New York City and whatnot, whether the particular policies they happen to push through come to fruition or not, or they get, you know, killed with lobbyists behind the scenes and slowing it down or whatever. Just the fact that we have this rhetoric and these proposals, I think will lead people that, you know, may have been toying with the idea of, yeah, eventually I want to sell my stuff and move down to Florida. They're going to accelerate those plans. And so even if you look at narrow regressions in terms of tax policy and population flows, if something doesn't jump out, still, this climate, I think, produces these effects, and it's just going to further the polarization that we're already seeing in this country. Okay, that's a good place for me to wrap up. Thanks for your attention, everybody. We'll see you next time.
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