What's It Worth?
A market-based approach to valuing illiquid assets -- a proposal for the California Billionaire Tax and beyond
The Problem: Valuation as Opinion, Not Fact
A finance professor once said: “Profits are an opinion; cash is a fact.”The same is true of asset valuations — and the gap between nominal value and functional liquidity is where enormous, largely untaxed wealth accumulates.
Three specific distortions matter for any wealth tax:
Appreciated stock in public companies is nominally liquid but functionally illiquid. Selling triggers a large tax event, so holders instead borrow against it, live on the loans (which aren’t income), and pass assets to heirs at a stepped-up basis that permanently eliminates the embedded gain. The “buy, borrow, die” strategy.
Founder stakes in thinly-traded or private companies carry paper valuations that couldn’t survive actual liquidation — the act of selling would move the market against the seller.
Startup equity has no reliable market price at all, forcing regulators to rely on formulas that systematically misvalue the most dynamic and fastest-growing assets.
The result: wealth that is real enough to exercise enormous political and economic power escapes the tax base almost entirely.
The California opportunity
The 2026 California Billionaire Tax proposal acknowledges the private-company valuation problem directly. Its default formula — book value plus 7.5x three-year average profits — works reasonably for mature businesses but fails for pre-revenue startups and concentrated founder stakes. The proposal does allow for an “alternative value” if either the state or the taxpayer can demonstrate the formula is inaccurate.
This alternative-valuation provision is the opening. A self-assessed market mechanism could fill it — more accurately, more fairly, and with less bureaucratic overhead than a government appraisal process.
A self-assessed valuation mechanism
The core idea draws on academic work by economists Glen Weyl, Paul Milgrom, and Eric Posner on “depreciating licenses” and Harberger taxation. Applied to wealth:
How it works:
The owner of an illiquid asset declares a value. That declared value is their taxable wealth for purposes of the wealth tax.
The declared value is simultaneously a standing offer to sell. Any qualified buyer may purchase the asset at the declared price within a defined window — say, one year.
If no buyer appears during the window, the declared value becomes the owner’s cost basis for future capital gains — replacing the current treatment that enables indefinite deferral.
Why it produces honest valuations:
The mechanism creates two-sided discipline. Overstating the value increases the annual tax burden. Understating risks a forced sale at a price below true worth. The equilibrium is an honest declaration — which is exactly the information a wealth tax needs.
Addressing the obvious objections
“A hostile party could force a founder out of their own company.”
This is the most serious concern. Several mitigations work in combination:
Right of first refusal — existing shareholders get priority to match any outside offer before a third party can complete a purchase.
Qualified buyer requirements — the forced-sale obligation applies only to buyers meeting defined criteria: no foreign sovereign wealth funds, no strategic competitors in defined industries, no purchasers above a certain ownership threshold without board approval.
Minimum hold period — the standing offer obligation attaches only after a reasonable period (e.g., 90 days) following declaration, giving founders time to raise financing or restructure.
“A foreign government could buy critical assets.”
Qualified buyer rules directly address this. CFIUS and existing national security review processes already restrict foreign acquisition of sensitive assets — those rules continue to apply. This mechanism operates within existing law, not around it.
“The state can’t administer a standing-offer market.”
It doesn’t have to. The mechanism is self-administering: the owner declares, the market responds or doesn’t. The state’s role is simply to record declarations, collect the tax, and enforce the forced-sale obligation if a qualified offer is made and refused. Substantially less overhead than fighting with accountants over DCF models.
“This would chill startup formation.”
The California proposal’s threshold is $50 million in net assets — well above the range where startup formation decisions are made. And a mechanism that produces honest valuations is better for startup ecosystems than one that enables indefinite paper wealth divorced from any market test.
The basis provision: a novel contribution
If the declared value becomes the owner’s cost basis when no buyer appears, the mechanism solves two problems simultaneously: it enforces honest valuation AND eliminates the “buy, borrow, die” strategy that currently allows appreciated wealth to permanently escape taxation.
Under current law, an owner can hold an asset indefinitely, borrow against it, and pass it to heirs at a stepped-up basis — permanently erasing the embedded gain. The basis provision means that every year of honest declaration also establishes a baseline for future gains, making the deferral strategy progressively less valuable even without a forced sale.
The bigger picture
The mechanism described here applies a general principle: wealth that is real enough to exercise power should be real enough to be measured and taxed.
The same logic that underlies Tim O’Reilly’s recent proposal for “Milestone Securities”. — making speculative market valuations accountable to real-world outcomes — applies here. Self-assessed valuation with market backstops lets markets do what markets do well — price discovery — while closing the gap between nominal wealth and taxable wealth.
The California proposal is an opportunity to pilot this at scale. A well-designed alternative valuation provision could be the most important innovation in the bill — and one that other states, and eventually the federal government, might follow.
Jim Forster studied engineering and did not take an accounting class despite his father’s advice.