Over the last year, there have been a number of policies aimed at taxing the wealthy and ultra-wealthy. It started last November when the “2026 Billionaire Tax Act” ballot initiative was proposed in California to impose a one-time 5% wealth tax on its resident billionaires. In March 2026, the state of Washington passed a Millionaires Tax which would tax all incomes above $1 million at 9.9%. And, most recently, New York City proposed a pied-à-terre tax, which would levy a surcharge on all second homes worth more than $5 million in the city.
The idea with all of these policies is more or less the same: raise taxes on those who have the highest ability to pay—the wealthy. However, just because the wealthy can pay doesn’t mean that they will pay.
For example, since the 2026 Billionaire Tax Act ballot initiative was announced in California, a handful of high profile billionaires including Google cofounders Sergey Brin and Larry Page and venture capitalist Peter Thiel have left the state. Some fear the same thing will happen in Washington state as millionaire earners flee before the Millionaires Tax takes effect in 2028.
But, what does the data say about such policy changes? Do higher taxes actually cause wealthy people to move? Or is the fear of capital flight overblown?
Do Higher Taxes Cause Capital Flight?
Though raising taxes on the wealthy should increase overall tax revenue in theory, in practice this isn’t always the case. The issue is that wealthy people can choose to leave and avoid the new tax. This is known as “capital flight” and it can actually lead to lower overall revenue after a tax hike is passed.
How so? Well, if enough individuals leave, they avoid the new tax and they take their existing tax revenue with them. So not only does the state not get the higher revenue they hoped for, but they also lose revenue they already had. The net effect could result in lower overall tax revenue even after raising taxes.
This is the double-edged sword of taxation and explains why raising taxes can be more of an art than a science. The problem with capital flight is that most people fall into one of two camps. They either believe that higher taxes cause capital flight or they don’t.
But the issue isn’t so simple. The decision to move because of tax policy is always made on the margin. For example, if a state proposed an additional $1 per year flat tax on all residents earning over $1 million, no individual would leave the state to avoid it. The cost is simply too small ($1) to lead to any behavioral change.
On the flip side, if a state proposed a 99% tax on all income above $1 million, nearly all the millionaire earners would either move, work less, or find non-taxable ways to compensate themselves. This policy would create a huge behavioral change.
At the extremes, you can see how policy would (or wouldn’t) impact behavior. But what about at the margin? What does the historical evidence say about taxing the wealthy?
For wealth taxes (not income taxes) in particular, the record hasn’t been great. One report noted, “While 12 countries had net wealth taxes in 1990, there were only four OECD countries that still levied recurrent taxes on individuals’ net wealth in 2017.” Most countries that implemented wealth taxes ended up repealing them because they weren’t effective at raising revenue and led to some capital flight.
[Author’s Note: An earlier version of this post cited an estimated loss from a Norwegian wealth tax policy change that was later discredited. I have removed such mention to maintain the accuracy of this piece.]
But wealth taxes don’t always fail. Switzerland has a wealth tax ranging from 0.1% to 0.7% across its 26 cantons (member states) that has been successful among its citizens.
Why does the Swiss wealth tax succeed while others have failed? The Swiss wealth tax has low, predictable rates applied to a broad base of individuals, while others have had a higher rate applied to a narrower base of individuals. In general, tax policies targeted at a narrower base seem more likely to cause capital flight than policies that apply more broadly.
But what about in the U.S.? Does tax policy tend to cause capital flight across state lines?
Historically, not all that much. Researchers analyzed over 45 million tax records across 13 years (1999–2011) and found that the millionaire migration rate was 2.4%, lower than the overall population migration rate of 2.9%. More importantly, when the authors modeled what would happen if all states had identical tax rates, elite migration fell by only about 2%. So while there is some relocation due to tax policy, in general most wealthy people in the U.S. seem quite embedded in their communities.
This makes logical sense too. The wealthy have their career, their network, and their children’s schools that they would need to leave behind if they wanted to move for lower taxes. So, unless a new tax policy is extreme, most wealthy people would simply complain about it and then get on with their lives.
As you can see, when it comes to whether higher taxes cause capital flight, the devil is in the details. Policies that are too extreme and targeted seem to encourage wealth migration, while those that are reasonable and broader in application don’t.
So, if you want to raise taxes successfully on the wealthy, the record of history suggests that the policy should be reasonable in size and apply to a broader tax base.
But, raising taxes is only half of the equation. How we spend the money is the other.
It’s the Spending, Stupid
Some of you reading this might be thinking, “Nick it doesn’t matter how much we raise taxes (and on who) if our government ends up spending the money irresponsibly.” I completely agree.
After all, the purpose of raising tax revenue is to spend it on helpful government programs. Things like education, healthcare, and infrastructure are worthwhile ways to invest in our society and its future. However, if there is rampant fraud, waste, and abuse in the system, then the real problem isn’t necessarily revenue, but how we spend that revenue.
For example, the Government Accountability Office (GAO) found that $236 billion in improper payments were made in 2023. This includes payments to deceased individuals and those no longer eligible for government programs. More importantly, the total amount of these improper payments has gone up nearly 7x over the past two decades:
This is why any policy that aims to fix budget shortfalls should attack both sides of the ledger. Those that want to raise taxes on the wealthy should be just as vigilant on cutting administrative bloat. I understand that this is easier said than done, but it illustrates how “raising taxes” isn’t the solution for runaway spending.
The Bottom Line
Every successful tax on the wealthy has been one that was small at first and increased slowly over time (or not at all). Switzerland’s wealth tax is a prime example of this (small and stable), and so is the U.S. income tax (small initially before growing over time).
When the U.S. income tax was implemented in 1913, the top 1% of U.S. households paid an effective income tax rate of less than 15%. It would take over 30 years before their effective rate exceeded 40% (from the Tax Foundation):
Note that I say “effective” rate and not marginal rate for a reason. The 1950s are often cited as proof that high taxes on the wealthy work, since the top marginal rates often exceeded 90%. But marginal rates, by themselves, are misleading. After deductions, exemptions, and loopholes, the effective rate actually paid by the top 1% was only around 42% (as shown above).
Since then, the effective income tax rate paid of the top 1% has declined slightly. Does this mean that income tax rates on the highest earners can increase again without much risk of capital flight? Yes, but these would need to be small increases in overall rates. Unfortunately, many recent tax proposals against the wealthy have been anything but.
This is why I believe California’s 5% wealth tax on billionaires will likely fail. It’s a big change that only targets a few hundred individuals, which is the exact kind of tax policy that has failed historically. Though Washington’s millionaire tax is also a big change and may get struck down by the courts, it has a better chance of success precisely because it applies to a broader group of earners.
Finally, NYC’s pied-à-terre tax seems likely to succeed because the tax is modest and applies to over 13,000 units. However, given how mobile second-home owners can be, this tax may not raise as much revenue as initially projected.
As the share of wealth held by the top 1% has increased in recent years, there are reasonable arguments to be made for increased taxation. However, as history suggests, successful tax policies tend to start small and apply to a broad base. Nevertheless, policymakers would be wise to examine overall spending in addition to finding new sources of revenue.
Tax policy is one of those areas where both sides are correct. Yes, wealth concentration is high and undertaxed. However, poorly designed policies (and policies that don’t address unchecked spending) aren’t the answer. We have to find a way to solve both of these problems. Otherwise, no matter how much we tax the wealthy, we will end up where we started.
Thank you for reading.
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This is post 503. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
