Elon Musk has created—and lost—more paper wealth than anyone in history, with most of that loss occurring in just four weeks. His net worth dropped by an amount nearly equal to the combined fortunes of Jeff Bezos and Mark Zuckerberg. Though Musk remains the world’s richest person, these wild paper swings expose fundamental truths about risk, entrepreneurship, and how we measure value.
SpaceX’s initial public offering (IPO) shattered records as the largest of all time, raising $75 billion in cash with an initial valuation of $1.77 trillion, eclipsing Saudi Aramco’s $29.4 billion and triple Hynix’s $26.5 billion. At its June 26 peak of $225 per share, Musk’s 42 percent stake pushed his net worth past $1.4 trillion, briefly making him the world’s first paper trillionaire.
But Elon does not have tens of billions of dollars sitting in bank accounts. His wealth comes entirely from his ownership of companies. In fact, Musk was not wealthier after the IPO than he was before it. Nor is he poorer now than he was when his SpaceX shares were “worth” more than a trillion dollars. What has changed is how the public values what he owned: five billion shares of SpaceX (roughly 42 percent of the company).
Although investors often calculate someone’s net worth or a company’s market value by multiplying the number of shares by the price of those shares, in the case of big companies and big stockholders, such calculations can be misleading. A company’s prospects can change overnight, and its share price may reflect that. But the latest trading price does not tell us what a large shareholder could receive for an entire stake.
In the case of SpaceX, the limited availability of its shares makes its market cap calculations highly speculative and misleading. With only 4 percent to 5 percent of SpaceX shares publicly trading, market cap calculations fluctuate wildly. Imagine an artisan who makes 1,000 glass ornaments and sells 40 for $100 each. The $4,000 cash in hand is real. Claiming her remaining 960 ornaments are “worth” $96,000 is fantasy. Flooding the market with the rest would crash the price immediately.
Valuing SpaceX and Musk’s five billion shares at the current share price runs into the same problem. Doubling the number of shares being traded would push the valuation down noticeably. What would quintupling the available shares do? Investors recognize this and so have been reassessing what the price of a share of SpaceX ought to be.
Since the SpaceX IPO, Elon’s paper net worth has plummeted. At its peak price of $225/share, Elon’s stake in SpaceX was worth $1.125 trillion. As of July 23, the share price was roughly $118/share, which means Elon’s shares are now worth roughly $590 billion. Meanwhile, a rough earnings report for Tesla sent its shares down nearly 57 points, erasing another $25 billion to $35 billion of his net worth.
The man is still incredibly wealthy. But his wealth on paper declined by more than half a trillion dollars in less than two months. For comparison, the next wealthiest individuals in the world are Larry Page (~$290 billion) and Sergey Brin (~$267.5 billion). So Elon has already “lost” nearly as much as the next two wealthiest people in history have made combined. But is SpaceX really half as valuable today as it was a month ago? No, investors have simply reassessed its value.
This volatility exposes why a wealth tax would be disastrous. It taxes money that doesn’t exist and may never materialize. Every $1 move in SpaceX share price shifts Musk’s paper net worth by $5 billion. A 5-percent wealth tax levied at peak valuation would have hit Musk with a $55 billion tax bill. Today, that same 5-percent tax equals $27 billion — leaving him on the hook for $28 billion in taxes on wealth that vanished into thin air.
Paying that kind of tax is not easy, even for someone like Elon. He would have to sell huge numbers of shares to cover the liability — and he would then have to pay additional taxes on those sales. Meanwhile, ordinary investors holding shares in those companies would watch the price of their shares plummet. Even many folks who want billionaires to pay more taxes shy away from wealth taxes.
Besides the patent injustices that would emerge, a wealth tax will also dramatically distort, or really destroy, the engine of entrepreneurship that has created companies of tremendous size and value that employ millions of people and generate hundreds of billions of tax revenue every year. Wealth taxes would force Elon and other billionaires to give up large parts of their ownership of companies they own and run.
Entrepreneurs become billionaires when they develop companies and products that people choose to spend their money on. You and I made Zuckerberg and Bezos billionaires by using Facebook and Instagram, or by buying stuff from Amazon. As participants in, and beneficiaries of, the market, we should want to see a healthy marketplace where we can succeed — whether making thousands or billions of dollars — because that kind of society not only fosters more innovation and wealth, but fires the imagination and it kindles hope.
Unfortunately, politicians regularly use the politics of envy and aggrievement to gain more power. While it can be cathartic to accuse the ultrawealthy of greed, excess, or any other vice, trying to punish them or expropriate their wealth through tax policy or regulation is not only unjust, it reduces everyone’s wellbeing. Entrepreneurs are not necessarily moral exemplars or super-human. They are something more humble and more valuable: prosperity creators.
In commercial societies with clear property rights, competition, and free exchange, dollars measure value. That’s the value of the hot dog stand, the car dealership, the cereal company, or SpaceX. We just shouldn’t tax people based on their paper wealth — because it could be gone next week. And such taxes will discourage the very innovation that improves our lives.
This piece by an AIER scholar originally appeared at The American Spectator under the title The Trillion Dollar Illusion.
