Noted economist Arthur Laffer joined the opinion pages of the Wall Street Journal yesterday to criticize Washington’s Initiative 1098. What resulted was a morass of confusion, obfuscation, and misdirection.
Washington’s I-1098 proposes a state income tax with a maximum rate higher than any of those initially adopted by the other 11 states. In one fell swoop, Washington would move from being one of the lowest-tax states in the nation to being one of the top nine highest.
Sorry, no. If you bother to actually do the math you find that it’s simply false that Washington would become one of the top nine highest tax states. So either the Wall Street Journal has flunked math—again—or else Laffer’s trying to pull a fast one here. (Actually, he’s trying to do it twice.)
The misdirection here is an oldie but a goodie: he’s obscuring the difference between marginal tax rates and effective tax rates, which are the taxes that people actually pay.
The truth is that Washington would remain among the lowest taxed states for income, as I’ve shown again and again. For example, under I-1098, a couple earning $400,001 per year would pay one shiny nickel in taxes—an effective tax rate of 0.00001 percent. Earn any less than the lowest tax margin—as 99 percent of households in Washington do — and your tax rate would be exactly 0 percent. I don’t know about Laffer, but I don’t think a 0 percent tax rate qualifies as “high.”
Even for the fraction of a percent of single-filers earning a whopping $1 million per year, Washington’s income tax under 1098 would rank only 22nd highest among the states. Don’t believe me? Please see this 50 state comparison of income taxes.
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What’s worse, he’s not even right about marginal tax rates. He slyly cites “the other 11 states”—but in point of fact the reference is to nothing more than an arbitrary batch of states he’s cherry-picked to make his point.
The reality is that 1098’s maximum rate—it’s highest marginal rate in tax-speak—is actually lower than the highest rate in California, Oregon, Hawaii, and Rhode Island, and it’s virtually indistinguishable from the top rates in Vermont, New York, New Jersey, Iowa, and DC.
The rest of the article’s sophistry basically falls out of these specious claims. Laffer gins up comparisons using selective economic growth figures that pit “states with no personal income tax” against various cherry-picked groups, such as “the nine states with the highest [marginal] personal income tax rates” and “the 11 states where income taxes were adopted over the past 50 years.”
You get claims like this one:
Comparing the nine states with the highest tax rates on earned income to the nine states with no income tax shows how high tax rates weaken economic performance.
Which is also false, but for a different reason: correlation is not causation.
This is such an elementary mistake that can earn you a failing grade in Logic 101. Even if the low tax states really are better economic performers, that fact doesn’t tell you why they do better. And it certainly doesn’t tell you how. (Post hoc ergo propter hoc, as us erstwhile philosophy T.A.’s like to say.)
There are hundreds of ways to slice economic data, and probably thousands of explanations for why different states have experienced different growth rates. And if you want to have fun with economic data, it’s worth pointing out that high-income people seem to congregate in states with income taxes.
None of which really matters, I suppose, because Laffer’s whole comparison is irrelevant to begin with. Why? Because as I’ve pointed out, under 1098 Washington would continue to be among the very lowest taxed states for income. Even if Laffer is right that low tax states, as a group, do better than high tax states, that’s no reason to be concerned about 1098. If 1098 becomes law, Washington will still be a very low-tax state for income.
And if you don’t understand that point, you flunk math.