Why Taxing the Wealthy is Harder Than it Looks

-->

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...