Powered by 
Wealth taxes are back on the policy agenda, framed as a way to raise revenue from the ultra-rich. In this Grumpy Economist Weekly Rant, John Cochrane evaluates wealth taxes using a simple economic test: whether a tax can raise revenue while doing minimal damage to the economy. From an economist’s perspective, he argues, permanent wealth taxes perform poorly because they tax returns to investment, reducing incentives to build businesses, invest, and grow the economy.
Cochrane explains why predictable wealth taxes encourage capital flight, reduce investment, and ultimately shrink the tax base. He also explores the paradox that only an unexpected, one-time wealth tax avoids distorting incentives—while showing why such a policy is not credible in practice. From an economic standpoint, the alternative is to tax consumption rather than investment, preserving incentives to save, build, and grow while avoiding the valuation and liquidity problems inherent in taxing wealth.
Transcript
Hi, I’m John Cochrane, a senior fellow here at the Hoover Institution, and welcome to my weekly rant.
This week’s rant, the wealth tax. Yes, it’s back. California’s proposing a 5% wealth tax just this once. France is proposing 2% per year. Billionaires are packing their bags and leaving.
Let’s think about this from an economist’s point of view. And first of all, what’s the question? Well, supposedly, the point of taxes is to raise revenue for the government while doing the minimal damage to the economy.
From that point of view, a permanent wealth tax is about the worst tax you can come up with. Why? Wealth taxes are a tax on the returns to investment. If you’re earning 4% on your investments, then a 2% wealth tax cuts your rate of return in half.
With less rate of return on investment, people don’t invest; they don’t build businesses; they consume today, and we get less growth, less investment, less tax revenue, and less income overall.
It’s like rent control. If the government has the rent you can charge, people don’t build apartments—same thing for factories.
And of course, billionaires can also leave the state, or in the case of France, the country. Then you get no tax and no income tax out of them either.
California will surely lose money overall on this deal.
The economist’s answer is tax consumption, not rates of return.
The paradox is, the perfect tax is a wealth tax. A once-and-for-all, never-again, unexpected grab of the wealth. Why? The investment was already made. I can’t have a disincentive to investment if you didn’t know the tax was coming. Of course, just this once? Well, a government that does it once, people feel we’ll do it again, and you lose the investment.
California’s wealth tax was really interesting to me because they attempted a just-this-once wealth tax rather than the typical 2% per forever wealth tax.
But they bungled it because they let us know what was gonna happen ahead of time, and so the billionaires are all leaving anyway. And again, just this once? Now, there are lots of taxes on investment returns already: corporate taxes, dividend taxes, interest, capital gains, and they are a mess.
We tax capital gains on inflation, for example, but then we forgive capital gains at death, so that people try not to sell and borrow against their wealth in order to consume.
Our government knows that’s a bad idea, so there’s a bewildering variety of exceptions: 401(k)s, 526Bs, IRAs, Roth IRAs, life insurance, and so on and so forth.
There’s lots of wealth taxes, property taxes, and estate taxes. Well, if we can’t get rid of all this mess, maybe we could have a single wealth tax in place of all of this stuff. Maybe that wouldn’t be so bad.
But I’m playing with economic theory again.
The other problem is practicalities. You have to value the wealth. What’s the value of houses, vineyards, private businesses held with multiple share classes and trusts, especially after the lawyers get a hold of it to try to make the value look lower than it was? You can also run into the fact that you simply don’t have the cash to pay the taxes.
Nah, back to the right answer. Let’s just have consumption taxes.
If you like this rant, don’t forget to hit the subscribe button.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.