(Mike Maharrey, Money Metals News Service) Here’s an economic truth you’d be wise to remember.
Incentives matter.
You may not like the way people respond to the incentives created by your program or policy, but you darn sure better take them into account.
Most people don’t.
They tout the easily identifiable perceived benefits of their program and ignore all the unseen potential outcomes that could ultimately unravel their plans.
This calls to mind French economist Frédéric Bastiat, who reminds us that, “Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.”
Let me tell you, there are a lot of bad economists out there. And it seems like most of them found their way into government.
Washington state just passed a tax bill that sounds great on the surface – if you’re just considering what is seen – but will likely create a fiasco because the policy hasn’t accounted for the perverse incentives it will create.
I’m talking about a “millionaire tax.”
Up until now, Washington state hasn’t had an income tax. In fact, the state constitution prohibits graduated tax rates. To work around this restriction, the Washington legislature created a 1-tier tax system at 9.9 percent with a $1 million deduction. (The new law is waiting for the governor’s signature. He’s expected to sign it.)
In practice, if you live in Washington and make less than $999,999.99 or less, you’ll pay no income tax. However, every dollar over $1 million will be taxed at 9.9 percent.
Reason called it “the most regressive wealth tax in the country.”
I don’t know about you, but if I were a millionaire living in Washington, I’d leave.
And that’s exactly what former Starbucks CEO Howard Schultz is doing. After living in Seattle for more than four decades and building the world’s premier coffee company there, Schultz and his family are heading to Florida, where there is no state income tax.
Schultz didn’t specifically cite the new tax as part of his decision to move, but you and I both know that the tax was a big part of his decision to flee the Evergreen State. Florida sunshine is great, but it’s even greater when you get to keep more of your hard-earned money.
And I guarantee Schultz won’t be the only one to rush out the back door. Rich people aren’t dumb. They know they don’t have to stay there and hand over a big chunk of their income. They have the means to leave. And they will.
Incentives matter.
Association of Washington Business President Kristofer Johnson gets it. He warned, “This move…will unfortunately cause more small- and medium-sized business owners to seriously consider starting, growing or moving their business to other states with a more stable tax environment.”
Ironically, Washington policymakers missed an opportunity to learn this lesson when they passed a 7 percent tax on long-term capital gains above $250,000. That prompted Jeff Bezos to exit Washington and take up residence in the Sunshine State.
Meanwhile, Washington lawmakers imagine that this new tax will allow them to eliminate sales taxes on diapers, over-the-counter drugs, and select hygiene products; provide free school breakfast and lunch; and generally “fund K–12 education, health care, [and] higher education,” according to Reason.
I’m going to predict this will be an abject failure. They won’t raise nearly as much from the millionaires’ tax as they expect because a lot of rich people will follow Schult’s example and break camp.
This is typical. Tax schemes rarely raise as much as forecast because smart people figure out how to avoid the tax.
Now, you can sit there and rail against “greedy rich people” and insist that they should stay put and pay up until the cows come home. That’s not going to make them stay put. Incentives are more powerful than your opinions on morality.
But politicians appear incapable of learning this lesson. Government people seem to believe that they can erase incentives by pronouncement, or something. Just look at all the dumb things they implement with perverse incentives, from rent control to “price gouging” laws.
In fact, California voters will consider a billionaire wealth tax this fall. Even lefty darling Gavin Newsom opposes this. He’s probably tired of seeing wealthy, productive people leave his over-taxed and over-regulated state. Well, Gavin, of your policies didn’t suck, people would stay.
Because incentives matter.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
