Seattle’s high-end wage tax and taxing stock returns


Sometimes random events come together in ways that help clarify our thinking. I had such an event last Friday. I was happy that day because Bloomberg ran a column by me on an idea I’ve toyed with for years: replacing the corporate income tax with a tax on stock returns.

The logic is that this is a simple and largely foolproof method of taxing corporate profits. Since the components of stock returns (capital gains and dividend payments) are public information, corporate tax liabilities could be determined on a simple spreadsheet. And, there is nothing for companies to argue over or contest, we know how much their stock rose and we know what they paid in dividends. If the corporate tax rate is 25 percent, that is what they owe, end of story.

By chance, on the same day, someone e-mailed me a piece from Fortune magazine on how Amazon is offering employees the opportunity to leave Seattle to move to offices in surrounding suburbs or other locations. As the piece indicates, at least part of the motivation for shifting employees out of Seattle is a tax on high-end wages that the city passed this summer.

Under this new tax, mid-size businesses (revenues between $7 million and $1 billion) would pay a tax of 0.7 percent on wages between $150,000 and $399,999. It would pay a tax of 1.7 percent on a worker’s pay in excess of $400,000 a year. Large businesses, with revenue of more than $1 billion a year, would pay a tax of 1.4 percent on wages between $150,000 and $399,999. They would pay a tax of 2.4 percent on a worker’s pay in excess of $400,000 a year.

This means that a mid-size business that pays a worker $1 million a year would pay a tax of $11,950 for that worker. A large company that paid a worker $1 million a year would pay a tax of $14,400. If we carry this out a bit and take a large company (e.g. Amazon) that pays a worker $5 million a year, we get a tax bill of $113,900. If they have ten workers in this category (stock options count as pay) then the tab would be $1,139,000.

I’m not doing this arithmetic to imply that this tax is a huge burden on Amazon. It’s an enormous company and can easily afford this tax hike. It’s also not a problem if this money comes out of the pockets of high-end earners, as would almost certainly be the case over time. Most of the upward redistribution of the last four decades has gone to high-end earners like these Amazon employees, not corporate profits. If these folks at the top see their pay knocked down a couple of percents, that is all to the good in my view.

My reason for pointing out the price tag of this tax is to show how much more it will now cost to keep high-end employees working in Seattle, as opposed to its suburbs, or in other locations around the country. If Amazon can persuade, or force, a worker earning $5 million to switch from Seattle to an office in a nearby suburb, it will save itself $113,900 a year. While Amazon can afford this payment, it is a safe bet that it would rather not make it. The piece in Fortune suggests that they have made this calculation and concluded that it would be a good idea to get much of Seattle’s high-end workforce to move out of the city.   

Whether Amazon’s behavior is typical or exceptional remains to be seen, and we also don’t know what share of their high-end workforce will actually be leaving the city. But clearly it is possible that a substantial portion of the people who were targeted by this tax will be relocating outside of the city.

Center for Economic and Policy Research for more

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