Published in The News Tribune October 27, 2010
It’s the Innovation Era! Creativity and ideas are what drive economic growth these days, not strong backs and the luck of geography.
So we should be especially interested in knowing what promotes “innovation” — and conversely what inhibits it. If you listen to many opponents of the state’s income tax initiative (I-1098), an income tax on the wealthiest Washingtonians will do the latter.
“I-1098 would significantly harm the state’s ability to attract new businesses” is a common complaint. Another critic writes that I-1098 harms firms “at the heart of the ‘innovation economy’”.
There may be good reasons for opposing I-1098, but that it will stifle innovation is not one of them.
Here’s the argument that it will. An income tax would deter innovators and job creators in our state from innovating and job creating because it would no longer pay (or pay enough) for them to continue doing so. So they refrain from innovating. Or worse, they flee to more innovation-friendly lands.
There are two assumptions made here. First, those subject to the income tax are the innovators and job creators in Washington.
Who exactly are the ones who make our economy dynamic and productive? And will these people be subject to the proposed income tax? For argument’s sake, let’s adopt the assumption of many I-1098 opponents that salaried employees aren’t innovators. In their account, innovators are the ones who employ others and make money by having invested in businesses. Of these people in our state, at most ten and more like five percent will be subject to the income tax. The other 95 percent of “innovators” will pay no income tax because their income is below the tax threshold.
Before talking more specifically about this five percent of the state’s innovators targeted by I-1098, let me try to rescue myself and most of you from the vast numbers of Washingtonians who by virtue of not having business income are not (by this account) innovators.
If you mean by innovation using your imagination to create new products that consumers value, chefs do that all the time. If you mean by innovation figuring out cheaper or faster ways to create the same product or do the same work, my car mechanic does that. Teachers do it when they hit on a lesson plan that is particularly successful, as when my son’s science teacher used lava lamps to demonstrate the geophysics of the earth’s core.
It’s hard to have an “innovation economy” without innovative labor. That means discussion of what makes for an innovative economy shouldn’t leave out the 85 percent of us working stiffs who collect a paycheck rather than run or invest in businesses.
But putting this objection aside, let’s turn to the second assumption made by those who argue that I-1098 will harm innovation: These innovators will stop innovating and creating jobs once their income becomes subject to an income tax. Recall this is about five percent of all the state’s citizens with business income — around 25,000 people, or about one out of every 130 taxpayers.
Will these people all stop innovating? The top tax bracket under I-1098, reached once your income hits $1 million, is nine percent. For the initiative to curb these individuals’ creativity, some of them would have to decide that while making an extra $1000 dollars might be worthwhile, making only $910 would not. If true, you could then conclude that the $90 income tax stifles innovation.
There is no doubt anecdotal evidence that the disincentive of an income tax would cause someone to kick back with a beer rather than innovate — or possibly even move to an income-tax-free state (Alaska, Florida, Nevada, South Dakota, Texas or Wyoming would be the candidates). But research pretty clearer shows that an income tax of this magnitude would not noticeably affect these choices.
So I-1098 neither targets nor discourages innovation in Washington. If we want an innovative economy with good jobs, the best way to achieve this is not by worrying about the effect of an income tax on those of us at the top of the heap, but rather to see to it that creativity, motivation and engagement in the workplace is widespread among business owners and workers alike.