Why everyone is mad at California voters, and the impolite fiction of the Nvidia-Groq deal
Welcome to Cautious Optimism, a newsletter on tech, business and power.
Monday. Welcome to the last few days of 2026. As the news cycle slows during the holidays, we have time this week to explore fewer topics in more detail. Keeping tabs on our favorite digital mess over the last few days, two topics commanded the conversation: The Nvidia-Groq deal and a proposed tax on billionaire wealth in California. Let’s stretch our legs, yeah? — Alex
Taxing illiquid wealth (mostly) won’t work
Or, why everyone on Twitter was mad over the weekend
A proposal in California to tax local billionaires a portion of their total wealth has incensed the technology industry. The proposal, dubbed a “one-time” and “emergency” tax to fund the state’s healthcare costs in the face of cuts to federal funding by its backers, would require California residents with fortunes valued at more than $1 billion to pay 5% of their net worth in either a lump sum, or spread out over five years (at the cost of a stiff penalty).
As written, the bill would theoretically raise around $100 billion, largely earmarked for state-level healthcare expenses. You can read the full text of the proposal here.
The idea of taxing the wealthiest individuals a portion of their holdings to fund state healthcare costs is good politics. The Act would impact around 200 people, it says, while potentially providing stronger healthcare, education, and nutrition benefits to millions. The questions I want to answer this morning are whether or not the concept is fair and if it is practical.
Keep in mind that the 2026 Billionaire Tax Act is a citizen ballot initiative. That means it was born outside of the California legislature. Instead, a healthcare union (the SEIU-UHW) put it together.
To pass, the Act must first collect enough signatures to be added to the 2026 California ballot. If it reaches the ballot, it then has to pass. Notably, citizen ballot initiatives do not require the governor’s signature; in California, the public can legislate on its own (though the courts can step in if the initiative in question is unconstitutional).
Is it fair? Sure. If we tax capital gains at a lower rate than income, if we offer investors a discount on their investments thanks to the recently-expanded QSBS exclusion, if we offer R&D tax credits, generational transfer tax exclusions, tax deductions for home ownership, and a cap on social security taxes, we’ve created a system that affords the wealthy ways to limit their tax profile. (You can see how American taxation compares to other nations here, measured as a percentage of GDP.) Asking folks who have a lot and receive tax-code perks to pay more is not unfair (though the Act is self-defeating, as we’ll see in a moment).
There is no perfect levy; all taxes drive negative incentives. But if we’re living in a low-tax nation (compared to the OECD) and we’re short of funds to pay for things people need, then taxing those with the most is a reasonably fair way to go about — or at least one that is more fair than, say, raising taxes on those with less, or the least.
The counterargument here is that state and national governments are inefficient, and thus raising more money to pay for things is a bad idea, as it shifts capital from the private sector (more efficient) to the public sector (less efficient). Doing so would create misallocation loss. Or if you want to be loose with your terminology, I suppose we could call it a sort of deadweight loss.
Wait, how can a wealth tax be fair? The idea of taxing net worth is tricky. Lots of billionaire wealth is illiquid, which means that taxing it is not as simple as taxing your next paycheck. If you have a net worth of $1 billion, say, but only $10 million in cash and other liquid assets and have a tax bill of $50 million, you’re in an uncomfortable spot.
You could divest some of your illiquid holdings at a discount, or you could borrow against your assets to pay the tax. The proposal is therefore downright messy in a state that creates lots of wealth that is held in illiquid form for years, if not decades.
The more intelligent way to go about taxing billionaire wealth in California would be to tax loans made against assets. This is obvious.
We already have wealth taxes in the United States. If you own a home, you pay property tax, which is a form of wealth duty. That said, no one likes to pay property tax. Indeed, it’s awful.
Does it matter if the tax is ‘fair’: No. Because the United States has a host of states apart from California that the wealthy in question could move to. That means that if the 2026 Billionaire Tax Act becomes law, California could lose the same 200 people it is considering carving 5% off of.
Chasing away some of your wealthiest citizens is probably not a good move if the goal of the original action is to raise revenue. Even more, a lot of the folks who would be on the hook for the tax in question invest in and build a lot of companies. If you scare them away, you could unwittingly shift a portion of your local business creation to rival states.
Whether or not the wealthy should flee their home state to avoid taxes is beyond the point. It doesn’t matter. Few are the people who are willing to pay more tax than they have to simply because they made their money in one particular location. Sure, many Californians would like it if the billionaires who made their fortunes in the state stayed put in the face of rising taxes out of loyalty, but they will not.
A mistake that many make is the presumption of a static tax base; that you can simply take more over time, and the underlying polity will remain unchanged. Incorrect.
The 2026 Billionaire Tax Act would prove a boon to Florida, Texas, and other states with tax codes more friendly to the wealthy than California. Put another way, lower tax rates in other states create a soft cap on how much California can ask of its own citizens; too much and they decamp.
Given the targeted nature of the 2026 Billionaire Tax Act and the high level of mobility that the handful of individuals it wants to charge have, I suspect the Act would do little more than push business to other states while raising precious little revenue. Trading long-term revenues for short-term nothing is a poor exchange.
So, while the tax is fair so far as taxes go, it would probably be at best ineffective and at worst create an incentive for the very industry that helped create so much local wealth to leave. If you think California is short on cash now, imagine if the tech industry started a slow-motion migration out of the state.
Overnight? No. Slowly but noticably? Yes.
The Groq deal isn’t even polite fiction
If you want to see smaller companies flush with private funds take on Nvidia through a different approach to handling AI workloads, you don’t want to see Nvidia buy Groq.
Enough tax arguing? Let’s have some fun. During the Christmas break, American GPU giant Nvidia decided to ~acquire Groq: