Proposed wealth tax risks stifling startup innovation

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OPINION – As a repeat tech founder, I’ve built my career at the intersection of technology, policy, and innovation. Through my companies I have founded, I’ve raised millions from investors and achieved valuations that reflect the promise of California’s startup ecosystem. But proposals like the wealth tax championed by Rep. Ro Khanna threaten to undermine the very environment that made my success possible.

The Billionaire Tax Act, a ballot initiative aiming for California’s November 2026 election, would impose a one-time 5% tax on residents with a net worth exceeding $1 billion, which is payable over five years and effectively 1% annually. Framed as a solution to fund healthcare amid federal Medicaid cuts, it targets unrealized gains, forcing billionaires to liquidate illiquid assets like startup equity to pay up. While Khanna argues this is “good for American innovation,” the reality is far more concerning: it could accelerate the exodus of talent and capital from Silicon Valley, crippling the startups that drive our economy.

Khanna’s support has ignited backlash from the tech community, with many warning of dire consequences. As Replit founder Amjad Masad put it on X, “If it passes, the net effect will only be the destruction of the SV startup ecosystem.” This isn’t hyperbole. The tax’s retroactive nature already has billionaires like Peter Thiel and Larry Page preparing to leave, taking their investments and networks with them. Khanna dismissed such threats sarcastically, echoing FDR: “I will miss them very much.” But losing these “economic royalists” means losing the funding that fuels early-stage companies. As someone who raised millions, I know firsthand how vital these investors are.

Critics rightly point out that taxing unrealized gains disincentivizes risk-taking. Venture capitalist Joe Lonsdale tweeted that the proposal is “unethical, unconstitutional and unAmerican,” warning it would “halt tons of hiring and investment, and lead to mass poverty for the middle and working class.” History backs this up: countries like France and Sweden abandoned similar wealth taxes after they sparked capital flight and failed to generate meaningful revenue. In California, where startups often achieve billion-dollar valuations on paper before profitability, founders could be forced to sell stakes prematurely, handing control to private equity firms and stifling growth.

Khanna claims a modest wealth tax won’t deter entrepreneurs like Nvidia’s Jensen Huang, who built his company in Silicon Valley for the talent, not tax breaks. But this ignores the marginal incentives at play. As Khanna himself noted in 2024, a blanket tax on unrealized gains could force founders to sell companies valued at $100-200 million, discouraging investment in high-risk startups where 95% fail. His recent pivot to supporting this tax, followed by calls for a fraud probe into state spending, feels like political positioning over sound policy, especially as he eyes national ambitions.

Amid this debate, Y Combinator stands as a beacon of what’s right about California’s innovation engine. Under CEO Garry Tan’s visionary leadership, YC has backed thousands of founders, including my own ventures in its pioneering Fall 2024 and Spring 2025 batches. Tan has been outspoken against the tax, warning bluntly: “This isn’t just a billionaire wealth tax. It’s a destroy tech in California proposition.” He’s right. YC’s model of providing seed funding, mentorship, and a global network has launched unicorns and created millions of jobs. Without YC’s support, companies like Caucus, which streamlines government workflows with AI, or vly.ai, which builds software 10x faster, might never have scaled. Tan’s focus on accelerating the “boom loop” through bold, founder-first investments is exactly what California needs to preserve, not penalize.

My journey, from American University economics grad to founding Turbo Legi (acquired by FiscalNote) and interning for Rep. Josh Gottheimer, taught me that innovation thrives on collaboration between public and private sectors. But policies like this wealth tax create division, not progress. California’s $18 trillion innovation economy, built on education, science, and immigrant talent, risks collapse if we drive away the builders. As Chamath Palihapitiya tweeted, we’d support gap-filling measures after audits and efficiency reforms, but this feels like “incentives for fraud, voter manipulation and larceny.”

Wealth inequality is real, but solutions lie in cutting government waste, investing in education, and fostering growth, not punitive taxes that shrink the pie for everyone. California voters must reject this proposal to safeguard our startup future. As a YC alum, I’m grateful for leaders like Garry Tan who fight for innovation; let’s ensure their work isn’t undone by short-sighted policy.

Amir Farahani is co-founder of Caucus (YC X25), vly.ai (YC F24) and Turbo Legi (acquired by Fiscalnote NYSE: NOTE).