California Proposition 40, aka The Billionaire Tax Act, will be on the ballot November 3. It would impose a one-time, 5-percent tax on the net worth of those with wealth exceeding $1 billion. Needless to say, this has attracted the attention of billionaires, but the masses of non-billionaires have a stake in this, too. Wealth taxes are bad taxes.

Let’s dispose of two aspects of the California tax at the outset. First, advocates say it will do no harm because it is a one-time event. Since the wealth that has already been created is the only thing taxed, it will have no impact on the future. But that’s only true if people believe it is a one-time event. If they think, “Hey, there’s no Santa Claus, and no Easter Bunny, I bet there’s no one-time money grab. They’ll do it again…” then they will respond to the expected future tax. More on that to follow.

The other feature is that it is a state-level tax, so billionaires can relocate to avoid it in the future. That is one more avenue for legal avoidance and makes a state wealth tax even more damaging than a national wealth tax. Indeed, a Hoover Institution study found it so damaging that it actually loses revenue for the state.

When AAF examined the national wealth tax proposals of Senators Warren and Sanders, there were two main features of the analysis that jumped out. First, a seemingly small tax on the stock of wealth translates into a large tax on the annual flow of capital income. If the rate of return on wealth is 10 percent, the 5-percent California wealth tax is a 50-percent tax rate on the return to invested wealth. There are lots of good reasons to fear tax rates around 50 percent.

Second, and most important, such a tax would deeply deter the accumulation and deployment of capital in the economy. With less capital in the future, labor productivity would be reduced and real wages would also be lower. That means the average worker is now affected by the wealth tax, not just the billionaires. Indeed, the AAF analysis showed that for every $1 of wealth tax, workers end up bearing a loss of $0.60. This isn’t a tax that helps the little guy.

In addition, there is the very difficult administrative challenge of a wealth tax, its dubious constitutionality, and unsurprising track record of failure when used in other countries. A wealth tax is simply a bad idea, even by California standards.