Local lawmakers in Seattle, Washington and state lawmakers in Massachusetts are considering or have passed new surcharges on higher-income households in their jurisdictions, squeezing successful members of society even more in the name of "fairness."
On June 14, Massachusetts House and Senate lawmakers took another step toward asking voters in 2018 to approve a new wealth surcharge on high-income households, approving a referendum petition placing the question on next year's ballot. If passed by the state's voters, individuals and households with more than $1 million in annual income – adjusted annually for inflation – will be taxed at a 9.1-percent rate instead of the current 5.1-percent income tax rate.
In July, on the opposite side of the country, Seattle City Council members approved a new ordinance that added 2.25 percentage points to the tax burden of individuals earning more than $250,000 and households earning more than $500,000. The tax rate will be applied to total income, not net income.
"Our goal is to replace our regressive tax system with a new formula for fairness," Seattle mayor Ed Murray told Reuters reporter Eric Johnson on July 10.
Instead of being "a new formula for fairness," these wealth surcharges are patently unfair, punishing people for being successful and discouraging productive work.
Soaking the rich, as it's called, creates a disincentive for small business owners to expand their businesses and purchase new capital and creates an incentive for skilled workers to move elsewhere, creating a regional "brain drain."
Small business owners unlucky enough to be caught in the crosshairs of such tax schemes will either scale back their businesses so they come in just under the threshold for enhanced taxation or move to jurisdictions less hostile to business development and expansion. This inevitably leads to there being fewer intermediate goods and raw materials purchased and transformed into consumer-ready goods and services, which in turn means that consumers will have a smaller number of products and services available for purchase and many jobs will be lost because not as many raw resources will be needed to be transformed into finished products.
Research shows that punitive taxes on the wealthy cause the very people targeted by these levies to relocate, defeating the stated purpose of the tax. University of Illinois-Chicago economics professor Erik Hembre found evidence that income tax rates imposed by states and cities had an effect on the success of sports teams, because teams in high-tax states and cities have a more difficult time attracting the highest-priced professional athletes.
"The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states," Hembre wrote.
Why would professional athletes care about tax rates? Because these highly talented, extremely wealthy earners, like everyone else, want to live somewhere in which they can keep more of the benefits given to them for their talent and hard work.
Instead of trying to search for a "new formula for fairness" – whatever that's supposed to mean – and penalizing success, Murray and other lawmakers, in every city council hall and statehouse in the country, should promote pro-growth policies that incentivize the formation of new capital and innovation.