As more lawsuits challenge Seattle’s income tax, new research examines income inequality and “the 1 percent”

Earlier we wrote of the first lawsuit challenging Seattle’s “illegal” and “unnecessary” income tax. The Washington Policy Center writes that two more challenges were filed yesterday. In his post, Jason Mercier notes,

… two more lawsuits were filed, one by the Freedom Foundation and one by the “Opportunity for All Coalition” represented by former Washington State Attorney General Rob McKenna, former Supreme Court Chief Justice Gerry Alexander, former Supreme Court Justice Phil Talmadge, and Dan Dunne, a litigation partner at Orrick Herrington. Of note in the McKenna legal brief is the fact current Attorney General Bob Ferguson declined a request to take action against the illegal Seattle income tax. From the brief

“On July 21, 2017, certain Plaintiffs made a demand upon Attorney General Bob Ferguson to investigatethe Tax’s illegality, and to file suit on behalf of all Seattle taxpayers specifically and Washington taxpayers generally to enjoin the imposition of the Tax and to obtain a judgment declaring it to be unlawful under state statute and the Washington Constitution . . . On August 3, 2017, Attorney General Ferguson declined to investigate the Tax and challenge its legality in court.” 

Mercier nicely summarizes the issues. GeekWire reports on the Opportunity for All challenge. 

The Opportunity for All Coalition is filing today’s lawsuit on behalf of several individuals, according to McIlwain. As Madrona’s managing director, McIlwain invests in a wide range of software-focused companies, like Accolade, Extrahop, Qumulo, and Smartsheet. He also sits on the board of the Fred Hutchinson Cancer Research Center and Washington Policy Center.

“I believe there are times when you need to serve your community,” McIlwain told GeekWire when the Opportunity for All Coalition launched. “In defeating the city income tax, we can help maintain a system of opportunity and job creation for innovators and workers.”

With the purported focus on reducing income inequality and taxing “the rich,” an article by Manhattan Institute fellow Brian Riedl provides some timely myth-busting perspective. We encourage you to read the whole, brief, piece. Among other observations, Riedl points out:

Overall, lifetime incomes show much less inequality than random snapshots in time. IRS data show that three-quarters of the top one percent fall out within six years. And measurements that focus on consumption rather than income — which take into account taxes, government benefits, and the lifetime smoothing of consumption — show little change in inequality across the quintiles between 1960 and 2014.

All that said, Piketty, Saez, and Zucman make a useful contribution to the study of income inequality. The major policy question (assuming one accepts the data) is whether this pulling away of the top 0.5 to 3.0 percent is really a “problem” to be “solved.” After all, the economy is not a fixed pie whereby one person’s wealth creates another person’s poverty.

In an observation particularly relevant to Seattle, he writes,

Bill Gates, Steve Jobs, and other computer revolutionaries set in motion a process that created enormous global wealth, revolutionized the economy, enhanced communications, and improved countless lives. That they retained a small fraction of this wealth and thus increased income inequality does not undo any of these societal benefits.

And with respect to the “fair share” arguments,

America already has the most progressive tax code of all OECD nations. The top one percent of taxpayers – which closely approximates the group pulling away from the rest – already pays 39 percent of all federal income taxes despite earning 15 percent of the income.

Although he’s writing about the federal income tax, his closing warning should resonate here.

Not enough taxpayers exist at those high incomes to solve the long-term budget deficit, much less finance new spending. Consequently, lawmakers who begin by calling for millionaire taxes often end up reaching much further down the income scale – where nearly three-fourths of income is earned outside of the richest five percent. Therefore, taxpayers hearing calls for “tax increases on the super-wealthy” should guard their own pocketbooks.