A proposed wealth tax in California is facing criticism, with budget expert Kent Smetters arguing that it would be an inefficient revenue tool. Smetters, a Wharton School professor and faculty director of the Penn Wharton Budget Model (PWBM), told Fortune that the measure is "born from a perfect storm of craziness in the current economic and social climate" that makes populist ideas appealing.
Smetters' analysis suggests that taxing the ultra-wealthy would not generate the expected revenue windfall for the state, which is currently grappling with a significant budget shortfall. He attributes this to behavioral economics and the "money illusion," concepts that describe how individuals often make irrational financial decisions based on perceived rather than actual value. The PWBM, widely used in Washington D.C., analyzes the fiscal and macroeconomic effects of federal policies.
California's proposed wealth tax has drawn objections from various quarters, including Governor Gavin Newsom, who, despite having ties to the billionaire class, was raised by a single mother. Tech entrepreneurs such as Anduril founder Palmer Luckey, and Google founders Larry Page and Sergey Brin have also voiced their opposition, with some reportedly considering leaving the state.
The debate around the wealth tax highlights the challenges of using taxation to address income inequality and budget deficits. Behavioral economics suggests that high taxes can incentivize wealthy individuals to relocate their assets or residency, potentially reducing the overall tax base. The "money illusion" refers to the tendency to think of wealth in nominal terms rather than real terms, which can lead to misperceptions about the impact of taxes on purchasing power.
The current economic and social climate, characterized by rising income inequality and economic uncertainty, has fueled support for populist policies like wealth taxes. However, experts like Smetters caution that these policies may have unintended consequences and fail to achieve their intended goals. The future of California's proposed wealth tax remains uncertain as the state legislature continues to debate its merits and potential impact.
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