The Washington PostDemocracy Dies in Darkness

Opinion Tesla and Elon Musk offer a case study in the billionaire tax’s complications

Tesla CEO Elon Musk in Shanghai on Jan. 7, 2020. (Aly Song/Reuters)
Placeholder while article actions load

What is Tesla worth?

The electric vehicle pioneer’s stock price has been rising like a billionaire’s rocket ship, and on Oct. 25, Tesla entered the rarefied orbit of trillion-dollar companies. Chief executive Elon Musk reached the summit of world wealth thanks to his company shares, with a fortune valued at some $289 billion.

That number is emblematic of the staggering fortunes that Democratic budget makers now seek to tax. A proposal from Senate Finance Chair Ron Wyden (D-Ore.) would place an annual levy on the appreciation of billionaire assets. Currently, gains in the stock market and on other assets are not taxed until the asset is sold.

You won’t catch me shedding a tear if Musk’s tax bill goes up. But Wyden may be opening the world’s largest can of worms. And he should call his bill the Tax Lawyer Full Employment Act.

Taxing appreciation of assets — capital gains — has until now been pretty straightforward. A share of stock, or a piece of real estate, or a work of art is purchased and sometime later is sold. The seller pays tax on the difference. Assigning a value to the asset is simple: It is worth the price agreed to by the seller and the buyer.

Follow David Von Drehle's opinionsFollow

The problem, according to Wyden and others, is that some people are so rich they never have to sell their assets, and thus never pay the tax. For the IRS to tax their unrealized gains, the agency must assign values to assets that aren’t on the market.

Sticking with Musk as an example: He has surely gained from his success with Tesla — but how much? The stock price isn’t the only way to value the company. Many investors would say a company is worth some multiple of its annual revenue or profit. Tesla’s stock trades at more than 300 times its annual profit; by comparison, Apple, the original trillion-dollar U.S. company, trades at roughly 30 times earnings.

Yet another way of pricing a company is to add up its assets: buildings, equipment, furniture, patents, customer relationships, the value of the brand, etc. Then subtract outstanding debt. Tesla is mighty in some of those categories but tiny in others. Overall, it’s not strong enough to earn an investment-grade bond rating.

History teaches that, over time, the gap between the stock market value of Tesla and the other modes of valuing the company will narrow. Either Tesla’s earnings will grow into its stock price or its stock price will shrink toward its earnings. Look at Amazon, which traced a similar straight-up trajectory; its ratio of stock price to earnings has narrowed to around 60 — still highly bullish, but down from the ionosphere. (Amazon founder Jeff Bezos owns The Post.)

Under the Wyden plan, Musk could owe billions based on speculative “profits” that exist only on paper. That kind of tax bill is likely to change billionaire behavior — but how?

One concern is that we’ll see fewer exciting companies entering the public markets. Privately held businesses have no published share price, so the IRS will have to value them based on more conservative methods. Whom will that hurt? Not the rich and certainly not the super-rich. They have the wherewithal to invest in private companies.

The people who’ll get hurt if the Teslas and Alphabets and Amazons of the future spend their go-go years in private hands are the mom-and-pop investors who can’t access private markets. Their nest eggs largely track the public stock markets, which in turn derive much of their lift from the froth churned up by a few high-flyers.

Valuing companies, furthermore, will be child’s play compared with valuing less-liquid assets. Yachts, mansions, vintage cars and so on produce nothing beyond personal satisfaction, so they cannot be valued as productive companies are. Their dollar appreciation depends solely on whether some other rich person wants them enough to pay more for them.

Having a billionaire president recently was educational. America learned just how fluid a great fortune can be. “My net worth fluctuates, and it goes up and down with markets and with attitudes and with feelings, even my own feelings,” Donald Trump once explained. Gaming the value of illiquid assets will be a new and very busy legal industry if the Wyden tax becomes real.

The so-called wealth tax has been tried in other countries, and it never lives up to its promises. France quickly abandoned its wealth-tax experiment due to lackluster revenue and unforeseen consequences.

Wyden and the Democrats aren’t wrong to want to pay rather than borrow for new federal spending. But this proposed tax feels like lashing out at easy targets. Unfortunately, those targets — precisely because they are so rich — are the hardest ones to hit.

Loading...