Taxing the Future through Wealth Taxation

Growing up, I loved the TV show “Duck Tales”. In it, Scrooge McDuck famously swims in a vault full of gold. Recently, many different tax proposals have been discussed, most prominently, the California plan to tax billionaire wealth. These plans seem to envision the wealthy as owning giant vaults of gold, waiting to be wheelbarrowed through the tax system over to the government coffers to buy bread for widows and orphans. The wealth of billionaires is nothing of the kind. Many billionaires derive most of their wealth from shares in corporations they founded, built or once managed.

So, if their wealth is not a vault full of gold, or even cash in the bank, what is it? What does the value of a share of stock even mean? A share price is not a measurement of cash the shareholder has already received, earnings the company has, the assets of the company, or anything else. It is the market’s estimate of sum of future earnings the company will earn in the future, discounted appropriately because shareholders will have to wait for those earnings to actually be earned.

The price-to-earnings ratio makes this especially clear. The P/E ratio is simply the price of a share divided by the company’s earnings per share. As the SEC’s investor-education site explains, investors use it to compare the price of a stock with the company’s earnings. A high ratio often reflects expectations of faster growth, not profits already sitting in the shareholder’s pocket.

Here are the latest fiscal-year P/E ratios I calculated directly from Compustat for the companies associated with the top ten billionaires from the recent Forbes 400 release who derive most of their wealth from the shares of public companies:

The median is about 29. Excluding Tesla, the average is about 27. Tesla is an obvious outlier and shows just how much a valuation can depend on extremely optimistic expectations about the future.

A P/E ratio of 29 means that investors expect that for every dollar of earnings earned this year, the sum of discounted earnings over the infinite horizon is 29 dollars. It’s all about the company earning in the future—29 discounted dollars in the future for every dollar actually earned this year. The value of stock in a company is usually greater than the actual assets owned by the company, or even the net assets (the average ratio of stock price to book assets in the sample of firms above is 6.27—the stock market value is worth more than 6 times the value of assets as per the financial statements). The value derives from the ability of those assets to generate earnings in the future. In other words, the value of a stock, in large part, derives from something that has not happened yet.

That is what makes an annual wealth tax on publicly traded stock so weird. The government would be taxing a valuation built largely on corporate income that has not yet been earned in an accounting sense, or even in an economic sense. Because stock prices reflect the future, it’s a tax on a value that incorporates expectations about what the company will earn.

Consider a simplified company earning $10 billion a year and trading at 30 times earnings. Its market value would be $300 billion. A founder who owns 10 percent would have stock worth $30 billion. A 2 percent wealth tax would produce a $600 million tax bill.

But the founder has not received $30 billion. The company has not earned the decades of expected profits that support the valuation. Investors have made a guess, and the wealth tax converts that guess into a current tax base. The founder may well sell those shares, and, receive something close to the full $30 billion. But, the founder himself will then have earned that income individually by selling the right to future earnings to someone else, and those capital gains, now realized, will be appropriately taxed by the tax system we already have through out tax on capital gains. There is no uncertainty about how much the individual will earn—they earned it by selling the right to future earnings.

If the founder does not sell, and the forecast eventually comes true, the future income will be taxed when the corporation earns it through out corporate income tax. If the profits are distributed as a dividend to the founder so the founder can buy something, the founder will pay a dividend tax. If they are retained and cause the stock to appreciate, the owner may pay capital-gains tax upon selling the shares. But a wealth tax adds another layer, imposed before much of the underlying corporate income even exists, taxing the future earnings of the company.

There is also no guarantee that those earnings will ever materialize. A stock that goes up by $20 billion one month can go down by the same $20 billion the next month. Tesla’s P/E illustrates the issue. Its valuation at the end of 2025 was more than 400 times its fiscal-year diluted earnings. That valuation evidently reflected expectations about future vehicle sales, autonomous driving, robotics, energy storage, and other crazy things only Tesla investors with vivid imaginations can imagine. A wealth tax would take some of that.

This is one reason the realization rule exists. Waiting until an asset is sold to tax it gives a definitive price to the asset, gives the means to pay to the taxpayer, but also resolves at least some of the uncertainty about whether the predicted income will actually come in. The fact that we are really taxing the future also has one unexpected outcome—because the future is impounded differently across different industries, Martin Jacob argues that a wealth tax may change incentives about where to invest.

None of this means that billionaires should pay little tax. But we should understand that taxing unrealized capital gains through a wealth tax means taxing predictions about future income that no one has earned yet. The cash does not exist. The assets do not exist. We are not taxing “money” the billionaires have. Rather, we are taxing expectations about future corporate earnings which are expected, but may nor may not actually come.