Proposed wealth tax risks destroying California’s innovation engine

By David R Henderson and Francois Melese. Excerpts:

"Many wealth tax advocates assume that a founder’s fortune represents wealth unfairly extracted from society. But economic research says the opposite. Nobel laureate William Nordhaus estimated that innovators capture only about 2.2% of the economic value they create. The other 97.8% flows to consumers. In short, a billionaire tech founder’s wealth is only a small slice of the value he or she created for society.

Google illustrates the point. Sergey Brin and Larry Page became extraordinarily wealthy by building one of California’s most valuable companies. Their combined fortunes are over $500 billion.   Yet, if Nordhaus’s estimates are even roughly right, the value that Google’s innovations create for consumers is measured not in billions but in trillions of dollars.

Much like AI companies today, Google’s technology was highly disruptive and displaced several categories of work—from print advertising to travel services. Total U.S. newspaper advertising revenue collapsed from nearly $50 billion at its peak in the mid-2000s to under $10 billion by the early 2020s. Meanwhile, as consumers increasingly booked flights and hotels online, jobs for U.S. travel agents tumbled nearly 50%, from around 124,000 in 2000 to roughly 66,000 today.

Happily, as has occurred throughout history with disruptive technologies, these highly visible losses were dwarfed by massive, but less visible gains. Google helped launch and accelerate new industries—from digital advertising and app development to search optimization and cloud services. Google’s platform helped birth a broad ecosystem where businesses can instantly reach suppliers and customers across the globe. Both consumers and businesses benefited as the cost of search and price comparisons fell, shifting bargaining power to buyers and intensifying competition among sellers to produce better products at lower prices.

According to the U.S. Bureau of Labor Statistics, since Google’s founding in 1998 employment in software publishing, internet services, digital marketing, and related information industries has grown by well over a million jobs. Google itself estimates that its Search, Ads, Play, Android, and Cloud ecosystems support more than 2 million U.S. businesses, publishers, developers, and nonprofits.

Brin and Page became billionaires by revolutionizing how billions of people find information, products and services. The fortunes they accumulated are not the result of wealth redistribution; they reflect a series of innovations that increased productivity, expanded consumer choice, reduced transaction costs, contributed to greater competition and more efficient markets, and helped create new markets and employment opportunities across the globe.

This matters for how we think about wealth taxes. Most startups fail. A handful like Google earn outsized returns that compensate investors and founders for those many failures. Meddling with the potential rewards reduces the incentive to take those risks—not just for existing billionaires, but for the next generation of entrepreneurs deciding whether and where to launch a company or pursue risky new technologies."

"But under current law the wealthy already pay a substantial share of the state’s [California] income taxes. The top 1% of taxpayers—around 180,000 filers—pay 40% to 50% of all personal income taxes. The state’s roughly 200+ billionaires alone pay 2-3% of all personal income taxes. They and the tech companies they founded also pay high corporate, capital gains, and payroll taxes."