J.D. Tuccille: The progressive plan to loot Silicon Valley keeps getting worse

Rep. Ro Khanna (D-CA) has an idea for promoting his pet wealth tax. To prosperous Californians who say their wealth is tied up in businesses that create value but don’t offer a lot of liquid cash to pay massive tax bills, the progressive politician responds that the government could loan them the money secured by pledges of corporate stock. That sparked a dispute with entrepreneur Mark Cuban who argues that it sounds more like a plan for creeping nationalization than for raising revenue.

At a time when socialists are on the rise in the Democratic Party, that’s very likely what it is.

“The California Democratic Party and the California labor movement just stood with @BernieSanders and me in supporting 5% wealth tax on 250 California billionaires,” Khanna posted on X on Aug. 15. “California voters want a Democratic Party that will stand up for the working class over the billionaire class.”

Even before Californians vote on the wealth tax proposal in November, the plan has already driven some high-net-worth individuals to leave the state. In January, venture capitalist Chamath Palihapitiya estimated that US$1 trillion of wealth had fled from California to avoid getting an expensive financial haircut that might be repeated in the future. Unsurprisingly, non-fans of punitive taxation pushed back against Khanna’s boast.

Mark Cuban, a Texas resident who has amassed billions of dollars from repeated tech startups, pointed out that no matter their paper worth, most company founders “are the definition of cash poor, stock rich.” He asked Khanna, “How are you going to tax them? Make them borrow money against their shares, if they can?” He emphasized that banks are already leery of debt-heavy startups, and unlikely to loan more money just to cover tax bills.

Khanna responded that if banks won’t loan the money the California government should.

“Allow illiquid founders to pledge shares with a loan from the government to pay tax. The loan period is long but not infinite (e.g. 10 years),” the lawmaker suggested. “The loan is non-recourse: at the end of the period, the loan is either paid back in cash, or the government assumes the shares.”

Cuban snapped back that having the state government loan entrepreneurs money to pay taxes to the state government makes no sense “(u)nless of course you want the gov to own shares.” The Texas businessman added that the implications would be demoralizing for investors who backed motivated founders only to see them muscled aside by state officials. “Cali, You make it. We take it!” he snarked.

Palmer Luckey, founder of companies including Anduril Industries, complained that the proposed tax “makes founder-led companies practically illegal” since it taxes founders not just on their ownership interest, but on their voting power in the company. “If a founder-CEO of a $1B private company owns 3% but keeps 100% of the voting power, he gets taxed on the value of the whole company.“

Luckey reiterates a point raised by the Tax Foundation’s Jared Walczak early this year. He cautioned that because of “aggressive design choices and possible drafting errors, the actual rate on taxpayers’ net worth could be dramatically higher” than the much-discussed five per cent. He called out language in the measure that specifies “the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer’s percentage of the overall voting or other direct control rights.”

As an example of what this could mean in application, Walczak pointed out that DoorDash founder Tony Xu owns 2.6 per cent of the company but controls 57.6 per cent of voting rights. His $2.41 billion ownership interest could turn into a much larger tax bill. “Since selling his shares incurs capital gains tax, moreover, and the entire value of these shares is capital gains for him, his total tax liability for his DoorDash shares would be $4.17 billion — 173 per cent of their value.”

Such a tax bill would be crippling, even to a wealthy entrepreneur. Watching just a few founders suffer such highway robbery would quickly drive the startup market out of California — except for those companies essentially seized by the state government as payment, of course.

Hedge fund manager Bill Ackman also jumped on Khanna’s proposal. He warned: “Under @RoKhanna’s plan, if the company fails, the founder has debt forgiveness income (DFI) which is taxable at ordinary rates.” Lots of startups fail, of course, and the progressive lawmaker’s plan would ensure that “the penalty for a failed startup is insolvency and the government garnishes your wages for life.”

That would be yet another deterrent to starting future companies in California and risking the partial success of high paper valuations that could put founders in the crosshairs of state tax collectors long before businesses are well established and generating liquid cash. Overall, the wealth tax scheme and Rep. Khanna’s clever idea for turning it into a tool for incremental government takeovers of California-based companies threaten to act as a powerful repellent for founders and investors.

Khanna’s main comeback is that the revenue is necessary to pay for California’s policy preferences. “If folks hadn’t supported Trump and his medicaid cuts, maybe we wouldn’t need this,” he responded.

But strongly desiring a whole lot more money than you have to pay for an ambitious and arguably unaffordable spending program doesn’t make tax schemes wise or viable. If they’re counterproductive and destructive, it doesn’t matter how much progressive politicians wish the truth were otherwise.

Ben Horowitz of A16z, the prominent venture capital firm, called the wealth tax proposal “the best strategy I’ve seen” to break Silicon Valley’s tech dominance, and he didn’t mean that as praise.

The last word should probably go to Mark Cuban, since his sentiments very likely represent those of many other investors who decide which startups to fund.

“IMO, if this passes, only idiot startup founders stay in Cali,” Cuban concluded about the wealth tax proposal. “I will make NOT being in California a prerequisite for an investment.”

Californians will vote in November on whether to implement the proposed wealth tax. Polls show a slight advantage for the scheme though the outcome is still uncertain. The final vote tally could very well transform the state, and not necessarily in ways intended by voters.

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