On July 6, the council passed the so-called “JumpStart” tax, which specifically targets middle-class jobs.
The council’s new tax will affect employees at medium-to-large companies, but not most small businesses. Applied to businesses with a total payroll of $7 million or greater, it will impose an additional 0.4 percent to 2.4 percent payroll tax on jobs that pay an annual salary of $150,000 or higher. This is on top of already steep federal and state payroll taxes.
Councilwoman Teresa Mosqueda promises that the new tax will create a “more robust and resilient economy.” Meanwhile, her fellow Councilwoman Kshama Sawant called it a “victory for working people.” Both claim the tax will raise $200 million in revenue for what they argue are much-needed social service programs such as housing subsidies.
By taxing payroll, the Seattle City Council is imposing taxes that fall directly on working professionals.
Sure, these are workers somewhat higher up on the income scale—but not by as much as you might think at first glance.
According to Payscale.com, the average salary in Seattle is $79,000. It’s the fifth most expensive place to live in America, with the highest rents anywhere in the country outside of California. With this context in mind, workers making $150,000 are far from members of “the 1%.” More realistically, many of the targets of this new tax are middle class by Seattle standards. So while the tax isn’t massive, it does showcase an important trend: In their class warfare charge, left-wing officials aren’t constraining themselves to “soaking the rich,” but are quickly reaching down the income ladder for fresh wallets to tap.
According to OpenTheBooks.com, 601 city employees in Seattle earned $195,000 or more. Analysts found that “tree trimmers lopped off $160,604; the chief librarian made $197,704; electricians earned $271,070; electrical lineworkers made $307,387; and police officers earned up to $414,543.” The new payroll tax will not apply to any of these government employees or their peers otherwise drowning in taxpayer cash.
Why the Nordic model works- or why the Laffer curve doesn’t mean what you think it means…
It’s a commonly cited aphorism that higher taxes mean slower economic growth and that you collect less revenue when you raise them anyway. The less trite version of this is the “Laffer curve”, the idea that there is some logical maximum point of revenue collection for taxes. If taxes were set at 100% then presumably nothing would work and you wouldn’t collect any revenue, but equally, you won’t collect any revenue with a 0% tax either. The maximum point is therefore somewhere in between 0% and 100%... which is not very specific.
So then what is the optimal tax rate?
That’s a complicated question so let’s break that down slightly. The first question is about growth. We clearly do not want taxes so high that they lower growth. The problem with this is that tax/GDP ratios of wealthy countries vary widely but long term growth rates do not. This is true both across countries and across time. The famous tax cutting governments of Thatcher and Regan achieved the same average long-run growth rate as those before or after them. (Some point out that the “neoliberal” low tax period has actually seen lower growth.) It doesn’t seem like tax rates affect growth very much and if they do it can actually be because they’re too low!
So the second question is what about maximising revenue? This should vary fairly wildly for different taxes and jurisdictions. It depends how easy the tax is to avoid and how attractive the jurisdiction is for business/residents and therefore how much it is worth paying to be there. That last part is really the point. If there was never any value in paying higher costs to be in a specific location then nobody would be paying London or New York rents and nobody would be employed in higher wage countries… but they are. So what would happen if we inverted the logic of the Laffer curve? If there is some maximum point for taxes and taxes don’t seem to alter GDP growth all that much then should we be aiming for that maximum point? Rather than implying that we should keep taxes to a minimum does the Laffer curve actually imply that we should maximise them? And what should we do with the revenue afterwards?
This does, of course, fly in the exact opposite direction of conventional political wisdom but let’s just go with the idea that we’re maximising tax revenue for a second, what is the result? Well, we have two options essentially, the government directs the spending in what it believes is a socially optimal way or the government hands that money back to citizens and lets them choose how it should be spent. That second one may seem a touch confusing, why tax citizens and then give them back the money we just taxed them? The answer is obviously that citizens are not one homogenous block and what we’re really talking about is redistribution, i.e. fiscal transfers.
Where taxes are high and government allocation of resources is high, rather than using fiscal transfers, this doesn’t necessarily slow growth but as that government spending is counted as part of GDP it’s not actually clear if those resources are allocated the best way they can be. That’s why fiscal transfers are so attractive. The ‘Nordic model’ as it’s called is essentially a high tax, high transfer model on top of a broadly free market. Clearly, those countries do not have runaway inflation, they do not have slow growth, they don’t have lagging economies or painfully high-interest rates so this model does appear to work… but why?
Let’s consider, ironically, the oversimplified framework used to explain why taxes are bad as an explanation of why, actually, this model might work quite well.
Often the “econ 101” argument goes something like this:
You have a traditional supply/demand graph with a rising supply curve and a falling demand curve that intersect somewhere at a price and quantity. If you add a tax (in the simplest case a per unit tax so that we can do the simplest possible shift in the supply curve) then the supply curve shifts upwards resulting in a higher price and lower quantity produced, i.e. a deadweight loss.
Is this actually what happens? Obviously not or I wouldn’t have brought this whole thing up.
Even in this super simplified model if we are talking about a tax used for government expenditure then that “deadweight loss” is actually a reallocation of resources. If that’s to something that is more efficiently paid for via the government (police, fire services, the army, healthcare, etc.) then it isn’t a deadweight loss at all but simply a more efficient allocation of resources. The other scenario is our fiscal transfers argument, what happens there?
Well in a fiscal transfers argument you might, at first, simply say that the demand curve shifts up by the same amount as the supply curve and so the price is raised but the quantity stays constant. (After all consumer preferences haven’t changed.) So there is nominal price inflation but no real ill effects as everyone can afford the increase. I.e. no real terms price increase. Except that isn’t what will happen either. The demand curve is not equally weighted for each consumer as each consumer has a different level of spending power. When you reallocate spending power, even with the same consumer preferences, the right-hand side of the demand curve will rise more than the left-hand side. The left-hand side may not rise at all. The result? Somewhat higher prices, although less than an equal rise across the whole curve, but also a higher quantity produced!
Now, this is still an oversimplified model and it doesn’t seem to be the case that Nordic model countries do have larger economies per se. However, and this is the important point, so long as the tax and redistribute is not so high as to cause inflation to jump above target or for interest rates to get too high and out of control the economy does not suffer from redistribution. The overall economic pie is just as large AND society is more equitable.
This is important for a couple of reasons:
1. It means the “high earners earn that much because they’ve worked hard and earned it” is incorrect. If it was correct then higher tax and redistribution would shrink the economy. It doesn’t and so in a free market economic sense, they have not “earned” that income.
2. It means we can achieve a higher standard of living for people both at the bottom and in the middle of the income distribution than we currently have with no ill effects. If we care about each person equally then we have no reason not to do this. Whether you are a Liberal, Social Democrat, Socialist or even, arguably, some variations of one nation conservative you should support doing this.
3. In a time when we are deeply worried about entering recessions while the central banks of the world run out of steam once they hit 0% interest rates but on top of that many are also worried about government debt then fiscal transfers/tax and redistribute, seems a very attractive tool to use to end recessions without government debt or trying to make negative interest rates work.
In short, redistribution is enormously important and enormously positive and we should put it at the centre of our economic model for the 21st century.
“It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.“
Note to Subscribers: Starting this week I’m doing a video round-up of the numbers that matter for the economy and liberty. Including the short-and-snappy version of today’s article, plus half a dozen numbers to shock, entertain, and occasionally horrify. Scroll to the bottom to watch.
New IRS data says the top 0.1% of taxpayers — one in a thousand — pays more than the bottom 80% of taxpayers.
Turns out we’re eating the rich after all.
That comes to 210 times their “fair share.” Essentially, 210 people drinking but the bartender hands one guy the check. With a lecture about privilege.
This comes from new IRS data finding the top 0.1% of taxpayers -- roughly 154,000 returns -- paid $440 billion in their most recent year.
That compares to just $350 billion for the bottom 80% of taxpayers -- which is pretty much everybody else.
It’s even more dramatic for the hated 1%, who pay nearly half of taxes despite earning just 1/5 of income.
Zoom out again and it gets downright comical: The top half of taxpayers cover 97% of the tab. The bottom half -- who alas vote -- paid just 3% of taxes.
So half the country is carrying the other half, plus Congress, plus 47,000 NGOs teaching sustainable Tesla dealership burning to sociology majors.
The Progressive Tax Racket
Interestingly, despite years of mainstream-media disinformation, the income tax has become dramatically more progressive. In 1980, the top 1% paid roughly 19% of federal individual income taxes. Today they pay almost 40%.
And this happened even though the top marginal income-tax rate fell from 70% in 1980 to 37% today.
Which seems counterintuitive until you consider lower tax rates encourage high-productivity people to work harder -- they don’t have to hand 70 cents to the IRS. That creates jobs, growth, and — yes — income. Which raises the amount of tax they pay even at the lower rate.
This is the famous Laffer Curve, named after one of Ronald Reagan’s favorite economists, Art Laffer. And the gist is tax 0% and you raise no tax, tax 100% and you raise no tax, there’s a sweet spot in the middle.
So going from 70% to 37% raised growth, raised taxes -- and dramatically raised the share of taxes paid by the rich. Suggesting perhaps we should try 20% tax. 10%. Perhaps no income tax at all, replaced with sales taxes that are far less destructive to growth and jobs.
Trust Funders of the Welfare State
Aside from the fairness question of one guy paying 210 bar tabs, there’s the political question that if most voters pay no tax that’s methamphetamine to leviathan that lives for tax hikes.
Especially when the new taxes are funding welfare, food stamps, and medicaid that now cover 74 million people who also, alas, vote.
Counting the benefits means the bottom 80% actually pays negative income tax -- they get more benefits than they pay in tax.
And those benefits have positively soared: In 1979 means-tested benefits covered 32% of income for the bottom fifth. That’s now 75% of income taken from people who actually worked for it.
This allows the poor to live a life of gentlemanly leisure, trust funders of the welfare state. According to the CBO, the highest-income fifth of married couples work on average 42 hours per week. The lowest-income fifth chill with just 25 hours a week -- part timers coasting on other peoples money.
What’s Next
We already have a tax system that places nearly the entire burden on the top earners, then hires tens of millions to sit on the couch and vote for more taxes, more welfare.
And more grift for the politicians.
And yet Progressives still beat the drums about making the rich pay their fair share.
Because it’s not about fairness, it’s about turning the rich into an endless ATM for the crony industrial complex, from bankers and military contractors to Learing centers, teachers’ unions, and NGOs.
The easiest solution is spread out taxes so every voter has a stake in the game. Ideally at a flat rate where everybody pays the same percent of income. Essentially, no representation without taxation. This keeps the rich paying more, but in a way that keeps Leviathan in check.
Of course both parties enjoy taking ever-greater shares of national wealth to squander. So Washington’s happy to play along that the prosperous will never pay their fair share.
Note to Subscribers: Starting this week I’m doing a video round-up of the numbers that matter for the economy and liberty.
Art Laffer receives the Presidential Medal of Freedom Wednesday. For decades, Laffer has promoted the idea that tax cuts pay for themselves, against all evidence to the contrary.
Arthur Laffer is to an economist what an astrologer is to an astrophysicist.
Laffer’s theory (”the Laffer curve”) was embraced by presidential candidate Ronald Reagan when he ran in 1980. Like most Republicans, he welcomed any excuse for another tax break for the rich. But the problem was that the Laffer-inspired Reagan tax breaks, implemented early in his presidency, did not produce the promised revenue for the federal government. So Reagan was forced to later raise taxes under the guise of “tax reform” to try to cap an exploding deficit. Yes, in those days Republicans did care about deficits.
Many Republicans understood from the start that Laffer’s theory was economic snake oil. One of them was George H.W. Bush who in 1980 called the Laffer-Reagan proposal a “voodoo economic” theory.
Bush, of course, became Reagan’s VP and later tried to fib his way out of his original (and correct) assessment of Laffer’s goofball idea.
Bad ideologies seldom completely die. Earlier this decade in Kansas, Republican Gov. Sam Brownback, a devout adherent of Lafferism, made voodoo economics the basis for Kansas’s state budget. After several disastrous years, the legislature overruled Brownback who later resigned and fled the state. To further safeguard against a return to Laffer voodoo economics, Kansas did something in 2018 that it seldom does -- it elected a Democrat as governor.
So we shouldn’t be surprised by Donald Trump’s eagerness to reward Arthur Laffer. Both Laffer and Trump ignore facts and feel that they have the power to remake reality to their own liking.
