My Twelve Minute Talk Explaining Why I Oppose the California Billionaire Wealth Tax (Prop 40 )

 Here is my talk’s full transcriptFull Transcript with Sections: Matthew E. Kahn’s Remarks on the Wealth Tax

Introduction: David vs. Goliath

I’d like to thank Emmanuel for visiting our campus today. Emmanuel’s a superstar in my field. And, as I was preparing for our discussion and debate today, I asked Grok what its subjective likelihood, what it thinks, is Emmanuel’s chance of winning the Nobel Prize in economics over the next decade. And Grok said 30%. And that—that’s roughly—I agree with that. I think that’s very impressive, and to benchmark that, I asked Grok what is my probability of winning the Nobel Prize over the next 10 years? And we know that the AI is a bit obsequious; it charitably said that I have a 1% chance of winning, so this gives you a sense of this Goliath versus David. I’m the underdog here, but I do have something going for me in this debate on why I oppose this wealth tax, and that’s by economic logic. In my brief remarks, I want to make five big points.

1. Growing the Economy and the Law of 72

First, in a university setting, and as I look at the young people in this room, this country and this state needs economic growth. And I’m always thinking about what public policies grow the pie. There’s always a question, and I know we’re going to debate this, on how we divide the pie, but there’s a fundamental question going forward: how do we grow the pie? I’m focused like a laser on the Law of 72, that if the economy grew by 4% per year with compound interest over 18 years, we doubled the economy. Right now, we’re not growing at that rate.

And a billionaire tax—even right now, it’s written down as a one-time tax—this represents a set of rules of the game. There’s a question for every current billionaire (there’s roughly 270 in California) and for everyone who might become a billionaire (I’m looking at the folks in this room). There have been many USC Trojan billionaires, and there will be more. Does the current one-time tax, and the expectation that this could happen over and over again in the future—that this is a precedent vote—does this act as a tax on effort and investment by young people and by entrepreneurs at every stage? Because I believe, and I’d love to be wrong, that if this initiative passes in the fall, this sets a precedent, and we’re going to start to see the revenue-starved Leviathan in Sacramento supporting initiatives to tax more and more of the wealthy. So the billionaires are sort of an easy target, these fat cats, but who’s next is one of the things I want folks thinking about in this room, and a fundamental issue in modern economics is the inability to commit (this is the time consistency problem of the Nobel laureates Finn Kydland and Edward Prescott).

2. Unintended Consequences, Mobility, and California’s Premium

The next point I want to raise is the unintended consequences of taxing the wealthy. And Emmanuel wrote one of the famous papers on this, his co-authored paper on soccer players in Europe responding to high marginal tax rates and voting with their feet to move to lower tax regions. We saw the Rolling Stones in the early 1970s leave England because of England’s high taxes. California, while it has amazing amenities, their substitutes—must move to Texas. We can’t be snobby here, especially as California faces wildfire risk, incompetent Sacramento politicians, and increased humidity, and apparently more mosquitoes and West Nile virus. While I agree that California is the best place on earth to live, I worry that due to bad governance and due to some evolving circumstances, California’s premium over other areas is declining over time. And if I’m right, then the California leaders can’t be cocky that they can just keep taxing the golden goose without there being consequences of more of the tax base leaving.

So I’m an urban economist, and there’s a refrain in urban economics about superstar cities: that places like New York City, places like Silicon Valley and San Francisco, that these are such inherently productive places that startups will always go there, and thus you can tax, you can have incompetent policies, and the next generation of superstars will keep showing up. But we’ve seen that Ken Griffin has moved to Miami. We’ve seen that Elon Musk has moved to Austin. And I want to warn—I’m one of the older people in this room—I want to warn you to not tempt the gods. I have a new paper called Location, Location, Location, where I talk about the fundamental role of superstars in our economy and where they choose to go; those places prosper, and California is slightly playing with fire if it pursues both its wealth tax and the likely tsunami that will follow, and the expectation that there’ll be rising taxes on the rich will lead to flight.

3. The Endowment Effect and Charitable Giving

The next point I want to raise is a little bit ironic. I am not a behavioral economist, and Emmanuel has spent his career at the leading center of behavioral economics at UC Berkeley. There’s an idea out of Berkeley called the endowment effect, that people value losses more than they value gains, and the billionaires who we take this wealth from are going to be angry. They’re not going to seek vengeance by throwing pies at—Bill Gates is not gonna hit me with a pie. But what he will do, I predict, is they’re going to be less charitable going forward, as they expect to be soaked. They’re going to give less money to universities, they’re going to give less money to charity. There’s a key counterfactual: what would these people have done with their money if we hadn’t soaked them? And the endowment effect predicts they’re going to be extra angry and extra stingy going forward. And if there’s uncertainty among the very rich, then the leadership of private universities and the great things that philanthropy funds are going to be pruned back. Look at the beautiful buildings we have on campus; look at the cures we have coming in medicine. This is expensive stuff. The billionaires have played a central role in unleashing this, and we should be grateful.

4. Poverty Reduction, Human Shields, and Public Sector Unions

Another point that I want to make here: I don’t want the young people in this room to view me as heartless. Yes, I oppose the wealth tax. No, I’m not receiving payment from any billionaires for this statement. The Nobel laureate James Heckman has a very cogent strategy for helping the poor. If this billionaire tax were to pass, why is it being earmarked for Medicaid payments? I could imagine it being given as lump sum vouchers to poor people for them to pay for healthcare, or it to be given for James Heckman’s early education program focused on helping new mothers of disadvantaged children to be better mothers, and that this is a way to raise the health and skills of young people so that they’re less likely to be poor and rely on Medicaid when they’re adults.

So I would pose to Emmanuel a very different vision of if we’re going to soak the rich—and again, I don’t support that, I really don’t like this dedicated sum, that 90% of it will go for this one cause. Now, why? I worry that the poor are being used as human shields here, that the real beneficiary are the unions in the public health sector, who are gonna go on strike, they’re gonna get bigger raises, better pensions, and all this money that sleepy taxpayers thought was being earmarked for the poor is going to be pocketed by this public sector middle class. And so this is almost—I realize my statement is cynical, but I also realize that it’s correct. And so for the young people in this room, it’s time to grow up and to think about good intentions versus outcomes. I’d be much happier with this so-called one-time redistribution if I knew that the money would end up in the pockets of poor people. The transfer here is indirect, to say the least.

Conclusion: Rules of the Game, Competition, and Opportunity

So, to wrap up my remarks, we should be grateful that so many California billionaires live in California, and during a time of bad governance, the question is how to create rules of the game to form more of these individuals and for California to compete for these guys. They create the companies; they create the excitement and the buzz. When I lived in Baltimore, when I taught at Johns Hopkins, there were members of the progressive staff who were proud that no billionaires lived in Baltimore. And to me, that was the market test, that Baltimore wasn’t succeeding as a city, because these people can live anywhere.

So I ask you, in this room, to think about what are rules of the game that people perceive as fair, and that encourage people to achieve their full potential on their own terms. This initiative, with its focus of a one-time tax (5%) on the very rich, is almost too clever. Here I haven’t engaged much in technical argument; my colleague at the Hoover Institution, Josh Rauh, and his state and local team have done much more work on quantifying this sort of Laffer curve, where they make the case that not only will this, quote, one-time tax boomerang, but that it will also cost California in the long run. It’s no accident that even Gavin Newsom opposes it right now.

And so I want to end where I started: Emmanuel is a terrific economist and thinking about the most important issues of equity versus efficiency. What I hope, ultimately, is that Prop 40 doesn’t pass. But instead—and I won’t be dancing with the billionaires that night when it doesn’t pass—instead, I hope we can have a more honest discussion of how do we improve the lives of poor people in an economy where there is significant inequality. And this raises key issues about the American Dream, about upward mobility. If there isn’t upward mobility, as Raj Chetty claims, why not? And there, my classical liberal work points to the monopoly of public schools and to challenges in our cities that limit the opportunities of poor people to have the same opportunities that so many people in West LA currently have. And so this is a question of how one extends opportunity through competition and choice. And there I would point young people to Milton Friedman’s Capitalism and Freedom.