Nobody knows what In-N-Out Burger is worth. In 75 years, the family that owns it has never sold a share or taken outside capital, which means there are no reference transactions to value the company against. The company refuses to franchise, sells a menu of roughly four items, pays its associates far above its competitors, prints red Bible verses on its cups, and has spent decades resisting every trend that has hollowed out the American fast food industry. In-N-Out can do all of this for one reason: because it answers to exactly one person, Lynsi Snyder, granddaughter of the founders, who owns it outright.
Then, last July, Lynsi Snyder announced she was moving her family to Tennessee and had decided to establish a second headquarters for In-N-Out there. In explaining the move, she told a podcast host that “there’s a lot of great things about California, but raising a family is not easy here.” Three months later, the initiative that would become Proposition 40 was filed with the California Attorney General.
This November, California will vote on Proposition 40, which would impose a one-time tax of up to five percent on the wealth of the state’s billionaire residents. The debate over Proposition 40 is already familiar to anyone who has followed wealth tax proposals before. Supporters argue that billionaires have disproportionately benefitted from the state’s semiconductor, software, and ongoing artificial intelligence booms, and should provide more resources to the state’s struggling budget and public services. Opponents argue the wealth tax will drive these billionaires out of the state and, by extension, their startups and companies, which will leave California in a massive fiscal and economic hole. Economists are debating revenue estimates, predicting the effects on business formation and investment, and trying to guess which billionaire will leave next. All of these debates share the single assumption that what’s being taxed is just money.
Lynsi has already left California, so the future of In-N-Out is not in jeopardy. Had she stayed, California voters would be deciding the future of a woman whose entire fortune is in a hamburger restaurant that has never taken outside capital. This raises a more fundamental question at the heart of the wealth tax debate that is almost never discussed: what does Lynsi actually own?
What Lynsi Actually Owns
Ownership isn’t as simple as it seems. Consider the founder and controlling shareholder of Acme Corp, a private startup located in California. Let’s call her Alice. Alice started Acme Corp five years ago as a solo founder and, despite multiple rounds of financing, she still holds just over fifty percent of the company. Three months ago, outside investors purchased a one-percent stake in the company through a preferred share transaction that valued the company at $10 billion. Conventionally, we would say this transaction means that Alice is worth $5 billion.
But Alice does not actually have $5 billion. She owns common stock in Acme Corp, a private company with no observable market price. Acme shares do not trade on an exchange, may be subject to transfer restrictions and vesting, and are structurally different from the preferred securities purchased by investors in the last round. The ten-billion-dollar valuation is just an inference from a particular transaction that may not represent the actual fair market value of the company given current market conditions.
Now assume Alice is affected by the wealth tax proposed by Proposition 40. California has to assign Alice’s ownership stake in Acme Corp a value, because the wealth tax requires the state to convert her ownership into a tax liability. In this case, California assesses her stake at $5 billion, creating a tax liability of $250 million, and Alice needs to find the cash somewhere. Because she doesn’t have $250 million sitting in a bank account, she is forced to sell shares of her company on the secondary market.
There is no button Alice can press to sell $250 million worth of shares in a private company. She will need to hire an investment bank, who will try to find buyers willing to spend hundreds of millions of dollars. Someone might hold the right of first refusal on any sale, discouraging other prospective investors from doing the required research to price the transaction and giving that one buyer enormous leverage to dictate terms. The transaction could take months, and Acme’s board might have to approve it. A prospective buyer might demand a board seat or other control rights in exchange for purchasing the shares. In a regulated industry, the government may itself have to approve the buyer. Perhaps the bylaws only allow direct family members to purchase shares, and if no one in the family has $250 million, what can Alice even do? Throughout all of this, every person sitting across the table knows the same thing: she has to sell.
All of this transactional friction is important to frame one point: a price established by a small transaction does not predict the price at which a large block of shares can be sold. The purchase of 1% of a company at a $10 billion valuation does not imply that Alice’s 50% stake can be liquidated for $5 billion. To meet her tax liability, Alice has to liquidate more shares than the headline valuation would suggest. And, in doing so, she reduces her ownership share below the 50% required to maintain control of the company.
At first glance, this looks like a simple and straightforward consequence of the tax. Alice owned $5 billion, paid $250 million in tax, and is left with $4.75 billion. But this description materially misses what Alice actually owned before she sold her shares to meet the tax liability.
Before the sale, Alice possessed the legal authority to control Acme. She could elect its board, appoint its management, determine how its capital was allocated, decide whether profits were distributed or reinvested, or pursue an acquisition. Ultimately, within the limits imposed by the law, contracts, and agreements with other shareholders, Alice could determine the strategic direction of the institution that she founded. After the sale of her shares, she has not merely surrendered $250 million of fungible value, she has surrendered control of her company.
Importantly, her control may itself be reflexively part of what made Acme worth $10 billion, as Alice can commit the company to projects that more diffuse ownership structures might abandon. Acme under Alice’s direct control and Acme without it are not really the same asset. The state has capitalized the value of Alice’s authority over an institution and used that valuation to compel Alice to dilute her control.
This mechanism is generalizable to any illiquid private property. A founder of an illiquid private company owns a set of rights to an asset that is extremely difficult to accurately value. The state has to assign value to that property by estimating the price at which it could hypothetically be sold, even when no comparable transaction has occurred, and ultimately create a liability proportional to the estimated value. Satisfying the liability will likely necessitate the founder alienating some of her shares, and thereby some measure of control, eroding or potentially ending that founder’s sovereignty over the future of the institution.
Ownership is Governance
Wealth is often discussed as though it were just deferred consumption. A person worth $5 billion is imagined to possess reserves of mansions, private jets, luxurious European vacations, and other consumption that he or she has just currently chosen not to enjoy. Under that taxation model, a billionaire wealth tax is just a change in the underlying distribution of consumption, reducing that of billionaires in favor of the objectives of the state.
But founders invest their wealth in entrepreneurial ends. A founder accumulates wealth precisely because he or she does not want to consume the underlying resources. They want to direct them, and the value of their ownership, in large part, represents the ability to keep thousands of people and war chests of capital organized around a singular mission for the organization.
This is what Lynsi Snyder actually owns. In-N-Out can refuse to franchise and pay their managers six figures because In-N-Out is organized around the goal of operating a world-class hamburger restaurant indefinitely. In a 2018 interview in Forbes, she said that In-N-Out was “…not about the money for us,” and that “Unless God sends a lightning bolt down and changes my heart miraculously, I would not ever sell.” Back when Lynsi’s uncle was the owner, he said that the thought of selling In-N-Out “…would be prostituting what my parents made by doing that.”
If she had stayed in California, it’s not hard to imagine what would happen when Proposition 40 passes. She would be forced to sell five percent of her stake in the company. This very first sale to outside investors would require Lynsi to translate the mission of In-N-Out from a company not primarily motivated by the pursuit of profit into a corporation with fiduciary responsibilities to a diffuse set of shareholders. Lynsi would now have to launder her intentions for In-N-Out through the lens of “shareholder value.” Even though her control is lost at 50%, her sovereignty over the business is lost with the first outside investor.
The landmark case of eBay v. Newmark makes this clear. Craig Newmark and Jim Buckmaster, the founder and CEO of Craigslist respectively, were sued by eBay for a breach of fiduciary responsibility. At the time, Jim and Craig together held over seventy percent of Craigslist, and eBay acquired a minority stake from a former third shareholder who wanted to exit his position.
eBay and Craigslist’s controlling shareholders had fundamentally different ideas about how Craigslist should operate. eBay saw Craigslist as a goldmine for ad revenue. Jim and Craig saw Craigslist as a largely free community service and were resistant to eBay’s aggressive attempts to monetize the platform. eBay ended up launching a competitor to Craigslist, and to protect their perceived culture of operating a non-profit-maximizing business, Jim and Craig attempted to adopt a “Rights Plan,” which would de facto prevent eBay from ever acquiring Craigslist.
In a landmark ruling, the Delaware Court of Chancery rejected the preservation of Craigslist’s culture as a valid justification for the plan:
Jim and Craig did prove that they personally believe Craigslist should not be about the business of stockholder wealth maximization, now or in the future. As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements. Indeed, I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities. The corporate form in which Craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.
Jim and Craig opted to form Craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that.
Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce. If Jim and Craig were the only stockholders affected by their decisions, then there would be no one to object. eBay, however, holds a significant stake in craigslist, and Jim and Craig’s actions affect others besides themselves.
The ruling of eBay v. Newmark did not require that a set of controlling shareholders must always pursue maximum profits. Instead, it concluded that once outside shareholders exist, the controlling owners of a company can’t use their conception of the company’s purpose alone to justify corporate decisions. Once there is a single outside investor, the controlling shareholders must exercise their authority within the constraints of fiduciary obligations to the corporation and its shareholders.
Viewed this way, sole control over a business is therefore not only a claim on its entire economic output, but encodes the structure of agency around which a central party, often a single individual, is entitled to make decisions that a collective of shareholders would never pursue. A wealth tax progressively converts an institution governed according to a particular private telos into one governed by the logic of shareholder maximalism.
California calls this taxation, but the mechanism exposes a constitutional problem that extends far beyond this particular ballot initiative: can the state impose a tax on an individual’s property in a way that foreseeably destroys the governance rights attached to that property?
The Missing Constitutional Limit
The Fifth Amendment explicitly constrains the federal government’s power to take private property for public use through a provision known as the Takings Clause. Quite literally, the amendment states that “nor shall private property be taken for public use, without just compensation.” Through the Fourteenth Amendment, the same restriction extends to state and local governments.
The distinction between taking property and taxing property is usually self-evident. If the federal government needs a plot of land for a military base, it can condemn the property, but ordinarily it must pay its owner just compensation for doing so. In contrast, when a county sends the owner of that same plot of land a property tax bill, it has taxed the property. Pushing the distinction to its limit reveals that the boundary is not always so obvious.
Consider that America is fighting a war, and urgently needs tungsten to manufacture munitions. The war has caused demand for tungsten to triple, making previously uneconomic deposits of the mineral extraordinarily valuable. A farmer in the country happens to own land that contains large deposits of the mineral, but he has not decided to start exploiting the reserves because it would disrupt his cattle operations. Because the underlying mineral rights belong to him, the wartime premium is reflected in an increased market value of the property.
The government could condemn the land or its mineral rights for the war effort but, in doing so, it would be required to compensate the farmer for the property. To get the tungsten without paying for it, imagine that the government imposes a one-time “property tax” equal to 100% of the newly-assessed market value of the land, which of course includes the value of the tungsten beneath it.
The farmer does not have enough cash to satisfy the liability, and his farm does not suddenly generate millions of dollars in income simply because the minerals beneath it have become more valuable. To pay the tax, he must sell his land, which includes the full value of it and the underlying mineral rights.
The government can technically say that it never seized the farmer’s land or tungsten. In substance, however, the government used its taxing power to compel the farmer to surrender the entire economic value of his land, the same value the Takings Clause would have been constitutionally required to compensate him for had it just taken the property outright.
Now imagine the tax is not 100%. At 50%, the tax will still force the farmer to sell the property or its mineral rights to satisfy the liability, since the land does not generate income remotely approaching the inflated wartime value of the tungsten beneath it. At 10%, he may still have to sell some portion of his property or mineral rights, but he can probably borrow against it. At 5%, we arrive in the vicinity of California’s proposal.
With each reduction in tax, the tax burden becomes more bearable for the farmer, but there is no clear line where the nature of the mechanism changes in practice. If a 100% tax on the value of the farmer’s property can accomplish essentially the same thing as confiscating that property, then calling it a “tax” doesn’t change that it is basically confiscation. The protections of the Fifth Amendment would be hollow if the state could pretend it was just imposing a tax. Somewhere, then, between ordinary taxes and confiscation, there must be some constitutionally protected boundary.
Drawing that boundary is extraordinarily difficult. Nearly any tax the government imposes reduces the marginal ability for an individual to acquire property, and may even require asset sales to meet them. If ordinary taxes were declared unconstitutional simply because the source of the funds used to pay the tax came from the sale of private property, then almost all taxation would be impossible.
However, the nature of the transformation occurring under these wealth taxes must give the courts pause. In the case of privately-held companies with a single shareholder, compelling the sale of a single share changes the governance structure of that company entirely.
If the state goes further and forces an owner to relinquish sufficient equity to destroy their control rights as well, it has arguably forced a transformation of the company via a process indistinguishable from a taking. The Court has ruled that personal property (Horne v. Department of Agriculture), intangible business assets (Ruckelshaus v. Monsanto Co.), ongoing concern value of the business (Kimball Laundry Co. v. United States), and even contractual rights (Louisville Joint Stock Land Bank v. Radford) are protected forms of property under the Takings Clause. The wealth tax will force the courts to consider if control itself is protected.
They will not have to consider the question in the abstract either, because Proposition 40 has a clause that directly targets voting control of companies. The proposition’s valuation rules state clearly that: “For any interests that confer voting or other direct control rights, the percentage of the business entity owned by the taxpayer shall be presumed to be not less than the taxpayer’s percentage of the overall voting or other direct control rights.”
A standard appraisal would value economic ownership independently of voting control because a given stake’s market value doesn’t map to its nominal percentage ownership of the underlying business. Proposition 40 ignores standard practice and instead instructs the state to value controlling shares as the percentage of voting power they represent multiplied by the market capitalization of all shares. Foreseeably, this will force many California founders to surrender control of their companies entirely.
The Infrastructure of Liberty
Private property creates domains where people can act without first obtaining political permission to pursue their goals. Freedom of speech gives an individual the right to publish whatever they want, but ownership of a media company gives them the means to distribute it and fund it sustainably. Freedom of association gives people the right to organize around common goals, but a company allows them to marshal financial resources to pursue that goal. George Lucas was constitutionally allowed to film whatever he wanted, but his ownership of Lucasfilm enabled him to do so.
In the modern world, private companies are how our constitutional rights are exercised in practice. The U.S. Constitution provides individuals the legal protection to act, which companies transform into a material capacity to act. A private company provides the vehicle for pooling material resources to say, I or we are going to do something else.
The price of an In-N-Out Double-Double represents something distinctly American. A family built a company, retained control of it through multiple generations, and used that control to make decisions that neither the state nor the financial interests of shareholders could question.
This is what makes the wealth tax so insidious and so much more than a way of raising incremental revenue. A state that can force independent institutions with non-monetary goals into diffusely-held entities is being given the power to end private agency and the pursuit of liberty via monetary transformation. The irony here is that capitalism has long been criticized for commodifying the value of social life by assigning prices to things that should not be understood purely in monetary terms. In practice, a wealth tax forces this onto every private institution via forced liquidation and transformation into an engine of shareholder capitalism.
This is not just important for California. Congressman Ro Khanna recently endorsed a federal version of the wealth tax, which contains a 2% annual tax on all wealth over $50 million. A threshold this low reaches far past billionaires, into any founder, family business, or independent project the state decides to appraise. The constitutional question raised by Proposition 40 is much larger than the particular fortunes of California’s billionaires. It is whether the state can force Americans to surrender the institutions through which they exercise their independence.