Deep in the heart of taxes - download

Peter Costantini

Photo credit: Ken Lambert, Seattle Times, 2015

On May 14, the Seattle City Council unanimously approved an ordinance to raise money for services for the homeless and construction of affordable housing, and on May 16 Mayor Jenny Durkan signed it. The legislation imposed a head tax – a simple per-capita fee paid by businesses – of $275 for each employee of the over 500 businesses with gross annual revenues of over $20 million. The approved measure cut nearly in half an initial proposal for a head tax of over $500 that had been developed over months of debate.

The final bill was expected to raise $47.4 million, down from $75 million from the original proposal.

The head tax ordinance faced loud opposition from Amazon and some other large businesses, the Seattle Chamber of Commerce, and the Downtown Seattle Association, among other groups. As soon as the law passed, they mounted a referendum campaign to repeal the tax, and reportedly were able to gather sufficient signatures to put the repeal proposal on the November ballot.

In the face of an opposition with “unlimited resources”, as one Council member put it, and the prospect of a divisive political battle, on June 12 the Council voted 7 to 2 to repeal the head tax.

Seattle faces two particular obstacles in raising funds to deal with a crisis of homelessness and lack of affordable housing in a booming economy.

The Washington state Supreme Court ruled in the 1930s that taxes on income were not permitted under the state constitution. This leaves Washington as one of only seven states that do not allow any form of income taxes. Its state and local taxation methods may be the most regressive in the country. The sales and property taxes on which they rely on primarily are now widely viewed as maxed out and squeezing middle and lower income families. This was a major motivation for the head tax proposal.

The other particularly acute issue for Seattle is that it only recently began to build out a regional rapid transit system. In 1970, when many cities were building systems with substantial federal funding, local voters rejected a major transit proposal. Finally, in 2009, Sound Transit opened the first line of a light-rail network scheduled to cover the area by around 2040. The late start means that considerable tax increases are now required to build out the system, in a period when federal funding has declined sharply. The lack of decentralized regional development hubs built around transit also makes it harder for the city to reduce pressure on housing and transportation in the central city, where Amazon and many other tech firms are now concentrated.

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I sent my paper, “Deep in the heart of taxes”, to the Seattle Mayor, City Council and other elected officials, under this cover letter:

What's all this about a head tax? Why, next thing you know, they'll be taxing necks and arms and legs and ... What? ... Oh ... never mind.

- tip of the hat to Emily Litella

Attached, please find my $0.03 (inflation-adjusted) on the path forward from the head tax.

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Download “Deep in the heart of taxes” as a PDF file:

https://tinyurl.com/ya8vg6rh

The LFTA (Lambos for the Few Tax Act)

In a piece on the Brookings Institution web site, Benjamin Page and William Gale offer an important insight into the Tax Cuts and Jobs Act by clarifying the distinctions between gross domestic product, gross national product, and net national product. Their analysis of the CBO numbers - concluding that foreign investors will reap nearly all of the benefits, and that the net domestic effect is likely to be a wash for the domestic U.S. economy over 10 years – surfaces an effect of the law that has remained mostly buried. [https://www.brookings.edu/blog/up-front/2018/05/10/cbo-estimates-imply-that-tcja-will-boost-incomes-for-foreign-investors-but-not-for-americans]

However, even if U.S. investors benefited more, change in total national income is not a particularly relevant way to measure on-the-ground economic benefits of government policies to the inhabitants of the economy. It ignores crippling levels of income inequality, vast unexplored opportunity costs and the established improbability of the tax cuts actually spurring much investment.

If Jeff Bezos lives down the block and Amazon stock goes on a tear, the total and mean income and wealth of our block will rise steeply, but that won’t make most of the rest of us better off (unless maybe he throws a lot of block parties and yard sales). Home values may rise, a mixed blessing, but so will property taxes and rents, as we have learned in Seattle. If he’s a good neighbor, though, we’ll all get Prime free one-day delivery.

In other words, any meaningful measure of the costs and benefits of government action needs to exclude high incomes: most of those from investment, except for middle and low-income retirees, and the upper stratum of incomes from employment, perhaps the top quarter or fifth. For decades, the incomes in the top brackets have continued to pull away from those of the majorities of working people. There is no collective social benefit in showering the wealthy with more tax largesse and increasing the gap. But, not surprisingly, there is a political payoff: they include the big Republican donors that the tax bill is designed to reward.

Another critical dimension of any fiscal proposal is the opportunity cost. Even if many lower and middle-income families would get some reduction in taxes from the TCJA, the operative question is still whether the same total expenditures on a less regressive tax reform - or an infrastructure bill or jobs program or universal basic income scheme or any other kind of spending – would give the working majority more bang for the buck, and the productive economy a more sustainable stimulus. It’s not enough that tax cuts offer some benefit: any such benefit needs to be weighed against other ways to use the same money that would produce more and better-distributed benefits, and be more effective in reducing economic inequality.

Finally, we need to go downstairs and pay a visit to the dementia-plagued great-uncle holed up in the basement of this and previous conservative tax plans: How likely is it that fat tax cuts lavished on big corporations and wealthy individuals will be invested in ways that create well-distributed growth and jobs?

We have plenty of evidence from the Ronald Reagan and George W. Bush tax cuts, According to Dean Baker, economist at the Center for Economic and Policy Research, “It didn’t work.” [http://cepr.net/blogs/beat-the-press/can-tax-cuts-spur-growth-46-254]

As Nobel-laureate economist Joseph Stiglitz wrote last year: “The sordidness of all of this [the then-proposed Republican tax plan] will be sugarcoated with the hoary claim that lower tax rates will spur growth. There is simply no theoretical or empirical basis for this, especially in countries like the U.S., where most investment (at the margin) is financed by debt and interest is tax deductible. The marginal return and marginal cost are reduced proportionately, leaving investment largely unchanged. In fact, a closer look, taking into account accelerated depreciation and the effects on risk sharing, shows that lowering the tax rate likely reduces investment.” [https://www.ineteconomics.org/perspectives/blog/why-tax-cuts-for-the-rich-solve-nothing]