Don’t Soak the Rich

Foreign Affairs | Daniel Waldenstrom

California voters rejected a high-profile state ballot measure proposing a net wealth tax on billionaires in late 2026, marking a turning point in Western legislative debates over concentrated fortunes. The proposal followed decades of warnings from economists claiming extreme income concentration undermines democratic institutions. However, empirical data from the Forbes 400 demonstrates that only 30 individuals—eight percent of U.S.

billionaires—donate over $1 million annually to political campaigns. Institutional guardrails explain the operational variance across democracies. Sweden and Switzerland maintain higher per-capita billionaire density than the United States, registering 4.7 and 5.0 billionaires per million residents respectively, while sustaining top-tier governance index scores. Earlier European experiments with net wealth taxes throughout the 1970s and 1980s distorted business investment, generated minimal fiscal revenue, and triggered widespread policy repeals. Transparent party financing rules, independent administrative agencies, and direct democratic referendums insulate political systems from oligarchic capture far more effectively than punitive tax regimes.

Comment

Proposals to tax illiquid private assets alter the capital structures supporting defense tech firms backed by venture entities like In-Q-Tel. When net wealth taxation reduces private risk tolerance, initial-stage financing for non-traditional suppliers entering U.S. Department of Defense prototype programs contracts. This dynamic undermines dual-use technology scaling without closing the political expenditure loopholes established under Citizens United v. FEC.

By contrast, Sweden separates private capital accumulation from legislative decisions via the Instrument of Government and statutory party funding disclosures. This institutional firewall enables holding companies to fund aerospace primes such as Saab AB without converting economic assets into campaign leverage. Consequently, Sweden's reliance on public party financing rather than net wealth levies protects private liquidity for the Gripen E production line.

Strategic Question for Discussion

If net wealth taxes restrict private venture capital flows to entities like In-Q-Tel, will western defense innovation depend more heavily on direct state R&D appropriations, or can sovereign wealth models fill the liquidity gap?

The trajectory indicates that capping high-net-worth private risk capital shifts early-stage dual-use development onto state-backed procurement frameworks, which historically move at a slower pace than venture funds. While public funding structures provide stability, they rarely match the agility of private entities like In-Q-Tel in scaling emerging software and autonomous systems. Consequently, state appropriations are likely to substitute for private risk capital only partially, creating operational lag in military tech adoption.

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