Tax Free No More

Taxes Are Really Economic Incentives

Democrats look at the tax code and use it to punish people, or to get money for pet projects. They see taxpayers as their personal piggy banks.

Republicans always say they are about lowering taxes, and sometimes they actually do it. But, most of the time they just talk about it. They leave in place the entire system, apparatus, and culture without really changing anything meaningful. As soon as the Democrats get into power, see the first line of this blog.

Washington state has some interesting things swirling around it right now as it pertains to taxes.

Go to a financial website that tracks taxes, and you will see Washington is one of the states in the US that charges zero tax on income. This is a big deal to a lot of people. If a state charges zero tax on income, then it should be getting its tax dollars from consumption taxes like sales tax. Then, people that consume the most pay the most.

We know that sort of rubric and culture don’t play well with the Democrats. Their ethos was uttered by Obama years ago, “you didn’t build that”. It’s not really your money, it’s ours.

We are seeing that play out in Washington state right now.

Microsoft CEO Satya Nadella sold almost 50% of his shares in the company last week. It turns out, Washington is instituting a 7% tax for long-term capital gains beginning at the start of next year for anything exceeding $250,000 a year. Startup founders and investors beware.

But, still a 0% income tax state right?

Others are speculating that Nadella is some sort of genius market timer. Microsoft has had a huge run and maybe this is a top? But, as anyone in the trading industry knows you cannot pick tops and bottoms. $20MM dollars in tax is still a lot of coin to avoid.

How many people have net worth tied up in their business? They might draw an income off of it, but the real net worth is the equity they are building by running a great business. When I was trading, I made money by trading, but I owned a seat that turned out to be very valuable.

Currently, there are all kinds of new tax schemes out on the table. They are simply designed to be money grabs for more government.

Taxes really function as economic incentives. They also are anti-competitive. When you tax something, you get less of it. People are rational even though you think they aren’t. Suppose a state decides to tax businesses of only 50 or more employees. What if my business is growing? I am at 49 employees. Do I hire the 50th and take the tax hit across my company?

If I am an individual, and by working more I will jump from one tax bracket to the next, do I engage in that labor? Or, do I stay satisfied with where I am at and do nothing?

In states like Illinois, you pay the full tax on the first dollar you make. In other states and with the progressive national tax code, taxes scale up. Of course, if you are in some occupations, you can delay taking income or move it around to avoid taxes. Hourly workers aren’t like that and neither are occupations like traders or commission salespeople. Only the truly wealthy can evade and exploit the tax code. That’s why a straight flat tax with no write-offs, or very few write-offs is the most efficient way and fair for everyone. You can’t lobby a flat tax.

As you might know, the federal government already taxes long-term capital gains. It fluctuates depending on who is in power but I have never seen it lower than 15%. Of course, the most tax-efficient rate is 0% for long-term capital. That sort of capital encourages risk-taking and business building. Short-term capital investment is something a lot different and if you are going to have taxes, should be taxed.

Washington state is also engaging in other shadow taxes or fees that a lot of states have. There is a new payroll tax that businesses have to pay. The money is being used to fund long-term care accounts for people. You can opt-out if you already have long-term care insurance but what if I don’t want it in the first place? What if the money being taxed would be better used by taking care of my short-term health? Or my retirement? Or just to buy something I wanted? Why should society fund an unnecessary government benefit like long term care when things like that are already funded?

You see, it’s not your life. It’s theirs. Taxes take away freedom of choice. Money is fungible and I am sure the debt of the state won’t go down.

In other states, they jack up fees for things like water, electricity, gas, internet, streaming, cloud services, meals at restaurants, rental cars, hotels, and cable. Sure, it only costs you a small amount of money per month but at the end of the day it adds up. It’s not as if you can avoid those sorts of costs.

By the way, if you don’t realize this you should. Corporations pay no taxes. They aggregate them by charging you a higher price, by paying employees less, or by finagling things inside their business to avoid them. The best thing America and states could do would be to have a 0% corporate tax if we were interested in economic growth and raising standards of living.

If Republicans get power again, it is time to really reform the tax code and entitlement programs. One small change would be taking public government employee pensions from “defined benefit” to “defined contribution”. That little switch takes the onus off taxpayers, puts employees in control of their money, and lines up the economic incentives for everyone better.

Washington state will be an interesting state to watch because of what is going on with the Democratic Party. People were fleeing California to go there since it was a perceived tax haven. Last year, ANTIFA flexed its muscles in Seattle. We know that Boeing has set up factories outside of Washington state and Microsoft also sets up out of state despite their longstanding ties there. Amazon set up a new second HQ near Washington DC. Boeing even moved its HQ to most tax unfriendly Chicago, IL. Of course, they wrangled lots of tax breaks so they essentially pay no tax for many years. Will the Democratic tax grab continue? Will Washington lose population by 2030 if it continues down the current path?