Will Wealth Taxes Hurt Washington’s Economy?

No.

A Penny From Your Yachts

Outgoing governor Jay Inslee has proposed a penny-on-the-dollar tax for wealth over $100M (the first $100M is free) to plug the state’s significant but way overhyped budget gap.

This has some conservatives and others in the business community who don’t seem to be aware of science or economics wringing their hands and saying it will tank Washington’s innovation economy.

So it is worth tapping this sign for the millionth time:

. . . decades of research show that lower taxes on the rich do not grow the economy and instead only increase inequality. Neither do they drive millionaires to migrate, as local tech billionaire Nick Hanauer recently reminded us. And they have “no detectable impact on startup activity,” according to the Federal Reserve.

I know many reasonable, well-meaning people who are certain that higher taxes prompt people to move, or hurt local economies. Some of them are my friends. To be fair to them, a lot of us were fed this Reaganite propaganda for a long time. It was kind of everywhere.

A lot of folks believe this in the business world too, where people still drink this rancid Reganite kool-aid. I come from this world and I know the type. They feel like they know about business-y stuff, since they are business-y people! Of course, skill at building products, managing a team, writing code, or crafting copy for commercials doesn’t mean you know a darn thing about how tax policy impacts migration across state lines. So I don’t think I’m really going out on a limb to say it makes more sense to look at a scientific analysis of what actually happens.

The notion that the net flow of talent and money is driven by taxes is simply not true.

Americans don’t migrate across state lines much, and rich people are less likely to migrate than others. And in the relatively rare instance that they do relocate (2.4% of them per year), they rarely move to more favorable taxing locations. 85% of the time they do not, and the data suggests that even the remaining 15% is accounted for almost entirely by retirees settling in Florida.

But that has not prevented a flood of the usual propaganda from the usual suspects. The Chamber of Commerce is funded by companies owned by a couple of people who might actually have to pay the tax, so it already out making gaslighting statements that imply the state government is loaded with waste, fraud and abuse.

This sounds like garden variety Newt Gingrich propaganda, but I guess when the Chamber’s biggest funder just dropped $2M on Donald Trump’s inauguration, we shouldn’t be surprised!

The Washington Policy Center, which brags that it is the “Heritage Foundation of the Northwest” (Heritage wrote Project 2025), harrumphs about a “direct attack on innovators.” Sadly, the press doesn’t mention that critical context about their wanna-be-Heritage status when it quotes them. Though to be fair to Geekwire, they did at least highlight the research about the millionaire migration myth!

Look, I understand there is a tax limit that at some point that will impact the economy and behavior. I don’t know exactly where it is, but we clearly are a long ways from it. Right now, Washington State has the second most “the rich get off scot free” tax system in the country. Given that we are 49th out of 50th on that front, and that the research shows that the entire range of taxes on offer in the US doesn’t impact economic growth or migration, we’ve got an obscene amount of wiggle room. And anyway, US taxes are at like an eight-decade low, and we were growing a lot faster during the high tax era.

How Would This Wealth Tax Work?

If you are reading this article, you are unlikely to ever know someone who will ever pay the tax. As mentioned above, the first $100M in wealth sitting around is free. After that, there is a penny on the dollar charge for each additional dollar.

Let’s think about how impactful that is to Joe Ninefigures.

For all my friends who were kids in the 80s

Imagine Joe has $200M to start with, and pretend also that he doesn’t have access to special investment vehicles or insider information about nonpublic companies. For some strange reason, his best shot is the stock market, just like average professionals that have enough money to invest some—call them Joe Sixfigures.

Now, the average annual return for the S&P 500 since 1957 is 10.26%. If Mr. Ninefigures invests this in an S&P index for ten years and just sits on his hands, his fortune is likely to grow to $533M. If he is subject to the tax, he will instead end with $497M. (Bear in mind that Mr. Ninefigures is probably paying much lower average taxes than Mr. Sixfigures, and also less than an actual working class Joe).

Other Reasons Someone Might Oppose This Are Better, But Not Good Enough

The best, but still not very good, arguments against wealth taxes is that they are difficult to administer. Because of this, the tax will be easy to dodge and expensive to levy and not yield that much income. Many people love to point out that some European countries have dropped their wealth taxes. (Norway, Switzerland and Spain have kept theirs. Bear in mind that Norway and Switzerland are two of the richest countries in the world, and Spain is the best performing economy in the rich world this year).

I’m not really sure why people who are against a tax think the ability to avoid paying the tax and it not raising much is a reason to vote against it, especially the ones that are also part of the movement that is fighting to defund the IRS to make it easier for people to dodge taxes. It’s tough to figure whether there is a bona-fide argument in there! If anything, their point mostly just suggests to me that enforcement should be rigorous.

It is true that some wealth taxes have been hard to administer because of intangible assets. But it is also true that these European wealth taxes started at much, much lower thresholds (like, $1M!), were riddled with exemptions, and thus covered hundreds of thousand more families and were infinitely more complex. We are talking about 3400 residents in total, with massive fortunes and no exemptions.

The problem of valuing intangible assets is real, but it is also easy to overstate in two ways. First, most of the wealth held by stratospherically rich people like Joe already has a valuation attached (stocks, even in pre-IPO companies, real estate).

And for the more intangible property, there is a straightforward, elegant way to manage valuation. When a resident declares the value of his Picasso, this should give the state treasury an automatic option to purchase the painting at that price. With a little enforcement, the nine, ten, eleven and twelvefigure families would rapidly converge on accurate valuations. (Shout out to the Princeton Economist who pointed out this strategy in a letter to the editor some yeas ago).

So yeah, I think the wealth tax is a delightful idea.

I’d like it to be federal, and I’d like it to go up a good bit, especially once a person hits a billion bucks, but this is a strong start.

Given that Washington voters just supported taxing the rich in the last election by a margin of almost 2-1, it seems like a safe bet with voters too.