In economics, the “Greater Fool” theory holds that investors buy overpriced assets expecting others will pay more for them later. So a stock or real estate bubble will continue until the proverbial “last fool” jumps in, at which point there’s nobody left to keep the bubble going and it bursts.
We need an analogous theory for tax policy these days. States like California, New York, and Washington continue to raise taxes and otherwise create an environment that is hostile to investment and entrepreneurship. The result has been an unprecedented flight of taxpayers and capital out of those states:
So how are the policymakers responding? They’re raising taxes further, imposing an even heavier burden on the remaining tax base. At some point, the last viable taxpayer will depart and the state’s fiscal health, just like a market bubble, will burst.
Businesses and investors residing in low tax states need to pay attention to all this, since the “Greater Fool” theory of taxation isn’t just a state-level challenge; it’s federal too. Despite the fact that today’s federal tax revenues are above historic levels and the tax code is more progressive (as in, the rich pay more) than at any time in the last 60 years, some folks want to raise taxes dramatically.
As the CBO noted in its last Budget Outlook, “Measured as a percentage of GDP, outlays exceed their 50-year average by a widening margin from 2026 to 2036 in CBO’s projections. Revenues rise just above their 50-year average in 2026 and then change little, remaining above that historical average throughout the 10-year period.”
Meanwhile the rich are paying a large and increasing share of those taxes. Here’s the Tax Foundation on that point:
So that’s good news – we’re getting more revenue from a more progressive code. How are some policymakers responding? They’re calling for even higher taxes, including taxes on wealth, taxes on high incomes, taxes on unrealized gains, taxes on loans, taxes on estates. The list goes on and on.
Returning to our Greater Fool analogy, the challenge is taxpayers and capital can leave a country too, not just states. Such migration might be a little more involved in some cases, but capital flight is a very real thing, and its economic consequences are harmful for the country on the losing end.
The good news is we haven’t fully crossed that line yet. America remains one of the top destinations in the world for millionaire migration, continuing to attract investors, entrepreneurs, and capital from abroad. But that standing can be reversed surprisingly quickly when policies move in the wrong direction.
For example, the UK is estimated to have shed some 27,000 high-net-worth individuals in 2024 and 2025 – the largest outflow of any country during that period – largely in response to new taxes on inheritances and investment income. It’s a similar story in Spain, Norway, and France, each of which have implemented some form of a wealth tax in recent years.
Keep in mind that taxpayer migration isn’t the only way capital avoids excessive taxation. It’s much easier for taxpayers to simply invest in other countries or in foreign companies. Sure, they have to pay the domestic tax on any returns, but at least the investment is in a pro-growth environment.
And what about capital that never comes here at all? Have a great idea? Plant it someplace else, so that when it grows, it skips the confiscatory taxes. For foreign based investors, they can look elsewhere, someplace with better rates and a more business-friendly environment.
Investing in assets that are well above their intrinsic value is a fool’s errand. So is taxing investment and capital at rates above what taxpayers are willing to pay. As our economist friends have demonstrated, federal tax rates already hover around their revenue maximizing levels. Raising them further will only encourage taxpayers and their capital to leave. That’s not a sustainable path for a state, or a country.