California’s 5% wealth grab: A masterclass in economic suicide – and a warning for SA

Key topics:California’s 5% wealth tax may trigger capital flight and economic harm.Taxing unrealised assets penalises founders, impacting jobs and investment.South Africa warned against similar wealth taxes amid fragile economy..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Alec Hogg.Winston Churchill famously said that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. If Britain’s most admired man of all time were alive today, he’d view recent moves by the Golden State of California with a mixture of horror and vindication. The state’s latest legislative brainwave – a proposed 5% "wealth tax" on the super-rich – is not just bad economics; it is a textbook case of how to kill the golden goose and smash its eggs. For members of the BizNews tribe who follow global capital flows, this development is more than just American political theatre. It is a flashing red light for our own policymakers in Pretoria who flirt with similar populist fantasies in a country where Golden Geese carry an even greater burden. Already, less than 1% of registered South African taxpayers - those earning over R125k monthly - shoulder the burden for 42% of the nation’s Personal Income Tax. Add the next group down (from R62 500pm) and you are left with under 350 000 people - half a percent of the population - paying over half the R738bn Treasury gets in PIT annually.Californian Confiscation.Back to the US West Coast, the proposal formally known as the "Billionaire Tax Act" (Initiative 25-0024), is striking in its overreach. It seeks to levy a one-time 5% tax on the worldwide net worth of the state residents whose assets exceed $1 billion. But the devil, as always, is in the detail. This isn't a tax on income – the money you actually make. It is a tax on assets – the businesses, shares, and property you own. And to stop the inevitable stampede for the exit, the legislators have added a retroactive "exit tax" clause, trying to claw back money from anyone who dared to leave California after January 1, 2026.Elon Musk saw the writing on the wall five years ago, moving his personal residence from LA to Texas back in December 2020. Others making headlines because they are now following him include Google’s founders Larry Page and Sergey Brin; tech entrepreneur Peter Thiel and venture capitalist David Sacks. Proponents argue this will raise $100 billion to plug the state's massive budget deficits, primarily to fund healthcare. It sounds noble. In practice, it is economic illiteracy masquerading as social justice..Why it is counter-productive.The problem with a wealth tax is that it ignores the fundamental mobility of capital. The movie has been witnessed many times in many geographies.In 1990, twelve European countries had a wealth tax. Today, only three remain. France, which stubbornly held onto its until 2017, saw an exodus of 42,000 millionaires, causing a brain drain and capital flight that cost the French economy twice as much as the tax ever raised. The Murati Paradox* is also at play here. Billionaires rarely have a billion dollars in cash sitting in a Capitec savings account. Their wealth is tied up in companies – Amazon, Tesla, Oracle. To pay a 5% tax on unrealised gains, founders would be forced to sell shares in their own companies. This depresses stock prices, dilutes founder control, and effectively penalises the very entrepreneurs creating the jobs.As University of Pennsylvania economists have warned, this incentivises founders to sell out early or never list in the first place. It is an assault on the compounding effect of capital..The Lesson for South Africa.For South Africa, the parallels are chilling.We constantly hear the siren song from the populist left – and increasingly, voices within the ruling coalition – calling for a "Solidarity Tax" or a wealth tax to fund the National Health Insurance (NHI) or the Basic Income Grant.The arguments are identical: "The rich have too much," and "We need to redistribute to stabilise society."But if California – the world’s 5th-largest economy with substantial institutional advantages – cannot make this work, what hope does a fragile emerging market like South Africa have?California risks an exodus of its tech titans to tax-friendly states such as Texas or Florida. South Africa’s wealthy have an even wider horizon: the world. As we have documented extensively on BizNews, the "semigration" of capital is already a torrent. A wealth tax would turn that torrent into a tsunami.Capital is cowardly and goes where it is treated best. It leaves where it is threatened. California is about to learn this lesson the hard way. Let us hope South Africa’s finance minister Enoch Godongwana is taking notes – and that he leaves the bucket handle alone..● The "Murati Paradox" is a term used in wealth tax debates to describe the disconnect between "paper wealth" (net worth) and "liquidity" (cash on hand). It specifically highlights the fatal flaw of taxing unrealised gains: a founder can be a "billionaire" on paper because their company is highly valued, yet have almost zero money in the bank to pay the tax. It is named after former OpenAI CTO Mira Murati, whose new startup, Thinking Machines Lab, was valued at $12bn by investors - to pay the $300m required by California’s 5% wealth tax, she’d be forced to sell a large slice of her company based not on what she possessed, but a paper-based net worth.

California’s 5% wealth grab: A masterclass in economic suicide – and a warning for SA

Related Stories

From 2,000 companies to 11: How ANC policy is killing South Africa's 160-year diamond industry

Vigilantes, police and politicians: The unholy alliance turning SA's anti-immigrant violence into a growth industry

Are you losing R30 000 a year in unnecessary tax?

With offshore investing the structure matters as much as the exposure