The Danger in California’s Billionaire Tax

The tax that begins with billionaires… the sample from 1969 and 1913… why your portfolio faces danger both manner… Luke’s government-backed alternative launching tomorrow

Nicely, that didn’t take lengthy…

In the beginning of the month, as our analysts have been unveiling their 2026 predictions for the market, I made one in every of my very own…

This yr will carry a wave of latest, controversial legislative proposals aimed toward funding wealth – proposals that won’t go instantly, however will introduce a brand new layer of coverage danger buyers must value in.

Behind my prediction was our ever-widening Okay-shaped economic system.

Within the Okay’s higher spoke, People with belongings are watching their internet worths soar because the inventory market and residential costs hold rising.

However within the Okay’s decrease spoke, People with out belongings face excessive retail costs and paychecks that aren’t maintaining with inflation.

The hole between these two teams is at traditionally broad ranges. Knowledge from the Federal Reserve reveals that the highest 1% of households personal 31.7% of all U.S. wealth. That is the very best share on report because the Fed started monitoring it in 1989.

Historical past reveals that enormous and chronic financial splits don’t keep contained. Over time, they have a tendency to provide coverage responses. That was the idea for my prediction.

With that context, let’s leap to CNBC from final week:

The Billionaire Tax Act, which is presently gathering signatures to be added to the November poll in California, proposes a one-time 5% tax on the full wealth of residents with $1 billion or extra in internet value.

The tax would apply to California residents as of Jan. 1, 2026.

Now, to be truthful, California’s Billionaire Tax Act was first proposed final fall. However final week introduced contemporary momentum as signature gathering formally kicked off for the November poll.

The risk to non-billionaires

You say you’re not a billionaire, so you don’t have anything to worry?

Honest sufficient. However let’s flesh it out a bit deeper.

President Trump’s AI and crypto czar, David Sacks, had a blunt evaluation of California’s proposal throughout an look on CNBC’s “Squawk Field” from Davos final week:

This isn’t a tax, that is an asset seizure.

By no means been something like this earlier than in American historical past.

Then, he added the vital level:

It’s not a one-time, it’s a primary time.

And in the event that they get away with it, there’ll be a second time and a 3rd time.

Does Sacks have a degree right here? Maybe one suggests all of us non-billionaires would possibly ultimately be impacted by such a proposal?

Historical past suggests “sure.”

The sample of tax proposals beginning slender and increasing broad is likely one of the most dependable dynamics in American fiscal historical past.

An costly stroll down reminiscence lane

Take into account the choice minimal tax (AMT).

When Congress created the AMT in 1969, it focused precisely 155 rich households that had used deductions and loopholes to pay zero federal revenue tax regardless of incomes substantial incomes.

The laws was offered as a “equity” measure – a manner to make sure the ultra-wealthy paid their “fair proportion.”

Sounds cheap, proper?

Quick ahead to 2017, simply earlier than the Tax Cuts and Jobs Act reformed the AMT. By that time, the tax was hitting roughly 5 million households – lots of them solidly center class.

That’s a 32,000X growth from the unique 155 households it was designed to focus on.

How did this occur?

Straightforward. The AMT wasn’t listed for inflation in its early a long time. So, as wages rose with inflation, an increasing number of “extraordinary” People discovered themselves caught in a tax designed for the ultra-wealthy.

Our authorities cherished the income, so it did nothing to curb the scope creep.

“No matter, Jeff – my wages are nowhere near getting me to billionaire standing. So, I’m nonetheless unconcerned. Tax away.”

Earlier than you land there, let’s revisit the federal revenue tax itself.

When first launched in 1913, it utilized solely to the highest 3% of households. The highest marginal price was 7% on revenue over $500,000 (roughly $15 million in right this moment’s {dollars}).

It was explicitly offered as a tax on the rich.

Inside a decade, charges had climbed to 77%. By World Warfare II, the highest price hit 94%, and the tax base had expanded dramatically to incorporate middle-class employees.

At this time, roughly 59% of American households pay federal revenue tax.

So, what began as a “millionaire’s tax” grew to become the first funding mechanism for the federal authorities.

Backside line: Tax proposals aimed toward “the wealthy” broaden downward over time.

Both via bracket creep, inflation-indexing failures, or outright legislative modifications, the definition of “rich” is usually revised to seize extra taxpayers and generate extra income.

“Jeff, I nonetheless don’t care. There received’t be sufficient scope-creep to have an effect on me in my lifetime. Make these billionaires pay their fair proportion!”

Okay, yet another wrinkle…

How this proposal may have an effect on all of us – instantly

Let’s assume, for the sake of argument, that California’s billionaire tax stays precisely as proposed – a one-time 5% levy on residents with $1 billion or extra in internet value.

There’s nonetheless a major drawback for the broader market – which implies you and me…

It is a tax on paper wealth, not revenue.

Most billionaires don’t have $50 million sitting in money to write down a verify to Sacramento. Their wealth is tied up in shares, actual property, personal firm fairness, and different illiquid belongings.

To pay a 5% wealth tax, many would wish to promote belongings.

So, whenever you’re speaking about liquidating billions of {dollars} in holdings – probably in a compressed timeframe to satisfy tax deadlines – that creates downward strain available in the market, which may instantly influence your portfolio worth.

Nevertheless it’s larger than that…

If the California wealth tax passes and generates huge revenues, you may be sure you’ll see the identical factor in New York, Massachusetts, Washington, and different blue states with massive concentrations of wealth.

Out of the blue, you’re pressured asset gross sales from billionaires throughout a number of states, all attempting to boost money to pay wealth taxes. Shares are the simplest belongings to promote, which – once more – means a serious headwind for fairness markets. And it introduces a brand new layer of uncertainty for buyers…

How do you worth an organization when a good portion of its largest shareholders is likely to be pressured sellers for tax causes moderately than basic enterprise considerations?

Do all these Discounted Money Circulate fashions from the Huge Banks now must again out the fairness possession of billionaire buyers?

However now, take it one step additional…

What occurs if this turns into a repeat wealth tax as David Sachs predicts? (Or moderately, “when” it occurs?)

What occurs when the tax threshold falls from $1 billion to $500 million?

Then $100 million…

$50 million.

How do you value that? What occurs if this turns into an institutionalized, yearly headwind of “pressured promoting” pushing in opposition to market positive factors?

You and me – with our sub-$50-million internet worths – will probably be protected from the tax itself, however our portfolio values received’t be protected from the influence of such wealth taxes.

So, what can we do about it?

The uncomfortable reality is now we have little management over whether or not proposals like California’s billionaire tax will go.

Given the widening wealth hole I highlighted firstly of right this moment’s Digest, I believe extra laws like this will ultimately go.

However whereas we will’t management the legislative surroundings, we will management our funding technique. And one of many few issues we will do is place our portfolios to generate sufficient wealth to offset the potential hit we’ll expertise – whether or not from increased taxes instantly, or from the market headwinds these insurance policies create.

And that brings us to new analysis from our know-how knowledgeable Luke Lango.

Tomorrow, Luke releases his newest analysis briefing on what he’s calling probably the most profound financial reorganization in American historical past because the signing of the Declaration of Independence.

Whereas politicians debate wealth taxes, Luke’s been monitoring one thing much more rapid…

A $500 billion authorities mobilization that formally launched on November twenty fourth with President Trump’s Genesis Mission govt order.

The three objectives?

• Use AI to speed up vitality developments
• Put money into quantum computing for scientific breakthroughs
• Develop AI for nationwide safety

The manager order explicitly compares itself to the Manhattan Undertaking and the Apollo Program.

And if that sounds grandiose, contemplate what occurred final time the federal government mobilized like this: Corporations like DuPont and Boeing delivered positive factors of 1,844% and 24,400% respectively.

This time, 52 corporations have been named to win the AI race in opposition to China, with exhausting deadlines beginning February twenty second.

These aren’t trillion-dollar mega-caps. They’re small, obscure names in quantum computing, nuclear vitality, and superior semiconductors.

Right here’s Luke with extra on the chance:

We’ve entered a brand new period the place the U.S. authorities is now not simply regulating markets… it’s actively partnering with personal corporations to win an existential race.

The USA is doing what it has at all times completed at pivotal moments in historical past: mobilizing personal business, clearing regulatory roadblocks, funding winners, and setting exhausting deadlines to realize a strategic aim.

By naming its companions and transferring cash, the federal government has made its priorities clear.

An ideal instance dropped this morning…

USA Uncommon Earth (USAR) introduced that the Division of Commerce will take an fairness stake within the firm – offering $1.3 billion in loans and $277 million in federal funding.

In alternate, the U.S. authorities will personal 8% to 16% of the corporate, relying on whether or not warrants are exercised.

Stepping again, Luke has spent months analyzing this chance and has recognized what he calls the “6-Layer AI Bottleneck Stack” – the particular choke factors the place authorities cash will movement and the place the largest positive factors will probably be made.

Right here’s his fast takeaway:

When limitless capital chases scarce bodily assets, costs go parabolic. The one strategy to make investments on this surroundings is to personal the choke factors.

It’s essential to personal the issues that our authorities can’t construct its AI with out, and which it presently doesn’t have sufficient of.

Tomorrow, Luke releases his full Genesis Mission analysis briefing with the particular corporations positioned at these bottlenecks.

I’ll carry you extra particulars in tomorrow’s Digest.

Wrapping up…

I opened right this moment’s Digest by highlighting my prediction that 2026 would carry controversial legislative proposals aimed toward funding wealth.

And simply three weeks into the yr, that prediction is already gaining momentum in California.

Nevertheless it’s not alone.

I’ll depart you with this…

• In December, Washington Governor Bob Ferguson proposed the state’s first revenue tax in fashionable historical past – a 9.9% levy on private revenue over $1 million.
• Michigan residents may face a poll initiative this yr including a 5% surcharge on people incomes greater than $500,000.
• Colorado simply superior a measure to vary its flat tax price to a graduated revenue tax, probably elevating greater than $4 billion when it goes earlier than voters in 2026.
• And New York Metropolis’s new mayor campaigned on elevating town’s revenue tax on millionaires by 2 share factors.

The sample is already rising.

We are able to’t management whether or not these proposals go or broaden. However we can management how we place our portfolios.

Extra assist from Luke on this tomorrow.

Have an excellent night,

Jeff Remsburg