A proposed wealth tax in California is causing significant unease among Silicon Valley founders, far beyond concerns about the state's existing 5% tax rate. The nervousness stems from the tax's unique approach to valuing assets, specifically targeting voting shares rather than actual equity ownership.
The proposed tax could have a disproportionate impact on founders who hold dual-class stock structures, which are common in the tech industry. These structures allow founders to maintain significant control over their companies even with relatively small equity stakes. For example, Larry Page, despite owning approximately 3% of Google, controls roughly 30% of its voting power through dual-class stock. Under the proposed wealth tax, Page would be taxed on that 30% control, a figure representing a substantial portion of Google's hundreds of billions of dollars in valuation.
The potential financial burden is substantial. According to the New York Post, one SpaceX alumni founder, now building grid technology, could face a tax bill at the Series B stage that would completely eliminate his holdings. This scenario highlights the potential for the tax to stifle innovation and discourage entrepreneurship in California.
David Gamage, a University of Missouri law professor who helped develop the proposal, believes Silicon Valley's reaction is an overreaction. He suggests founders could utilize deferral accounts for assets they don't want taxed immediately, with California instead taking 5% whenever those shares are eventually sold. However, the complexity and potential long-term implications of such deferral strategies remain a concern for many in the tech community.
The debate surrounding this proposed wealth tax underscores the ongoing tension between California's desire to generate revenue and its need to maintain a competitive environment for technology companies. The future of innovation in Silicon Valley may depend on whether a compromise can be reached that addresses the state's financial needs without unduly burdening its most successful entrepreneurs.
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