• Tag Archives economics
  • Seattle’s Brazen Tax Grab Ignores the Unintended Economic Consequences

    Over the last several years, certain members of the Seattle City Council have embarked on a quest to make the city a socialist utopia. From raising the minimum wage to a whopping $15 an hour to instituting a ridiculous soda tax on consumers, Seattle loves to squeeze money from its residents and business owners in any way it can.

    On Monday, the City Council continued this pattern by voting to implement a new “employment tax” on large Seattle-based businesses. The city is justifying this tax on major job creators like Amazon, Microsoft, and Boeing by blaming them for Seattle’s increase in homelessness. By the city’s logic, these companies have set the bar too high when it comes to employee wages. This has subsequently led to an increase in housing prices, which the city believes is responsible for the rise in homelessness.

    By instituting this new tax, the city hopes to be able to build 1,780 low-income apartments over five years with the revenue collected. And while this tax was surely created with the best of intentions, the logic behind it falls flat. Punishing companies for voluntarily paying their employees generous salaries is so absurd, it sounds like a proposal straight from the mind of a Randian villain. But it also seems particularly ironic coming from the very same city officials who championed using force to incrementally raise the minimum wage just a few years ago.

    And while the city has yet to acknowledge the detrimental impact this minimum wage increase has already had, they are also ignoring the potential consequences of this new tax. But if the city is not careful in considering both the seen and the unseen repercussions of this new employment tax, they might soon find that all the job creators have had enough.

    Private Sector Opposition

    Amazon has been one of the first companies to voice its opposition to this new employee “head” tax. And it is no surprise why. The tax would require every Seattle-based company with revenue over $20 million to pay 14 cents for each hour worked by Seattle residents. This adds up to about $275 per employee each year, which means that these companies will end up paying an estimated $47 million a year for five years. This is an outrageous demand for companies that are doing more for job and wealth creation than all of Seattle’s big-government programs put together. In fact, Amazon alone is responsible for creating over 40,000 jobs.

    Amazon spokesman Drew Herdener issued a statement saying:

    We are disappointed by today’s City Council decision to introduce a tax on jobs. While we have resumed construction planning for Block 18, we remain very apprehensive about the future created by the council’s hostile approach and rhetoric toward larger businesses, which forces us to question our growth here.”

    Amazon also questioned the city’s own spending habits when Herdener mentioned that the city revenue growth “far outpaces the Seattle population increase over the same time period. The city does not have a revenue problem — it has a spending efficiency problem.”

    But Amazon is not alone in their opposition to this tax. Starbucks, another Seattle-based company, also has some grave concerns over the city’s apparent spending problem. Public affairs chief John Kelley commented on the matter saying that the city “continues to spend without reforming and fail without accountability…”

    A group of Seattle tech leaders also stand in opposition to the tax, but that has not done much to deter the city government.

    While Mayor Jenny Durkan was initially opposed to the original employment tax proposal, which was asking for 26 cents per hour worked for each employee, she seemed more than satisfied with the version that passed this week. She stated:

    This legislation will help us address our homelessness crisis without jeopardizing critical jobs. Because this ordinance represents a true shared solution, and because it lifts up those who have been left behind while also ensuring accountability and transparency, I plan to sign this legislation into law.”

    But making such a bold claim about the impact, or lack thereof, that this new policy will have on job growth completely ignores the consequences that are not immediately seen.

    The Seen and the Unseen

    All actions have consequences, and when those actions are meant to control the economy, the consequences can have far reaching implications. In his essay “What Is Seen and What Is Not Seen,” French economist Frédéric Bastiat explained that all government actions have consequences that are both immediately seen, and also consequences that are unseen.

    He writes:

    In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

    There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

    In the instance of the new Seattle employment tax, the “seen” is the revenue generated by the city through this new tax. But City Council members are so blinded by how this money can potentially decrease Seattle’s homeless problem that they fail to see how this tax may also have negative implications.

    Unless you are the Federal Reserve, money is not simply printed out of thin air. And while the city government routinely ignores the economic realities that come with using other people’s money, the private sector understands that the money has to come from somewhere.

    In order to pay for this new tax, which again taxes companies for each hour worked by employees, the obvious solution would be to lay off employees or cut back on employee hours, or both. Amazon is one of the largest employers in Seattle and forcing the company to lay off employees or trim the number of hours they can work will not serve to help the city’s homelessness problem. In fact, in many ways, it could be adding to it.

    There is already a fear that automation will jeopardize human jobs. And while much of this fear is unfounded, by instituting a “head tax” on employers you are basically incentivizing them to move away from taxed labor and right into the arms of automation.  

    Additionally, between the minimum wage increase and the new employment tax, there is also the possibility that these companies get completely fed up with Seattle and choose to leave the city altogether. Layoffs, reduced hours, and companies leaving are just a few of the “unseen” consequences of this new policy.

    If only the Seattle City Council was wise enough to read Bastiat, they might be able to save themselves from a world of economic trouble. But the fact of the matter is, many politicians and legislators see only the immediate consequences, and completely ignore the “unseen.” However, economic realities can be ignored forever, anyone who doubts this fact need only look at the city of Detroit.

    Brittany Hunter

    Brittany Hunter

    Brittany Hunter is an associate editor at FEE. Brittany studied political science at Utah Valley University with a minor in Constitutional studies.

    This article was originally published on FEE.org. Read the original article.

  • American Taxpayers Are Subsidizing Cronyism in Eastern Europe

    Because of their aggressive support for bigger government, my least-favorite international bureaucracies are the International Monetary Fund and the Organization for Economic Cooperation and Development.

    But I’m increasingly displeased by the European Bank for Reconstruction and Development, which is another international bureaucracy (like the OECD and IMF) that is backed by American taxpayers.

    And what does it do with our money? As I explained earlier this month in this short speech to the European Resource Bank in Prague, the EBRD undermines growth with cronyist policies that distort the allocation of capital.

    In some sense, the argument against the EBRD is no different than the standard argument against foreign aid. Simply stated, you don’t generate growth by having the government of a rich nation give money to the government of a poor nation.

    Poor nations instead need to adopt good policy—something that’s less likely when profligate and corrupt governments in the developing world are propped up by handouts.

    That being said, the downsides of the EBRD go well beyond the normal problems of foreign aid.

    I recently authored a study on this bureaucracy for the Center for Freedom and Prosperity. Here are some of the main findings.

    The EBRD was created with the best of intentions. The collapse of communism was an unprecedented and largely unexpected event, and policymakers wanted to encourage and facilitate a shift to markets and democracy. …But good intentions don’t necessarily mean good results. Especially when the core premise was that growth somehow would be stimulated and enabled by the creation of another multilateral government bureaucracy. …Unfortunately, even though its founding documents pay homage to markets…, there’s nothing in the track record of the EBRD that indicates it has learned from pro-intervention and pro-statism mistakes made by older international aid organizations. Indeed, there’s no positive track record whatsoever.

    • There is no evidence that nations receiving subsidies and other forms of assistance grow faster than similar nations that don’t get aid from the EBRD.
    • There is no evidence that nations receiving subsidies and other forms of assistance enjoy more job creation than similar nations that don’t get aid from the EBRD,
    • There is no evidence that nations receiving subsidies and other forms of assistance have better social outcomes than similar nations that don’t get aid from the EBRD.

    I also delved into three specific downsides of the EBRD, starting with its role in misallocating capital.

    In a normal economy, savers, investors, intermediaries, entrepreneurs, and others make decisions on what projects get funded and what businesses attract investment. These private-sector participants have “skin in the game” and relentlessly seek to balance risk and reward. Wise decisions are rewarded by profit, which often is a signal for additional investment to help satisfy consumer desires. There’s also an incentive to quickly disengage from failing projects and investments that don’t produce goods and services valued by consumers. Profit and loss are an effective feedback mechanism to ensure that resources are constantly being reshuffled in ways that produce the most prosperity for people. The EBRD interferes with that process. Every euro it allocates necessarily diverts capital from more optimal uses.

    I explain why taxpayers shouldn’t be subsidizing cronyism.

    …the EBRD is in the business of “picking winners and losers.” This means that intervention by the bureaucracy necessarily distorts competitive markets. Any firm that gets money from the EBRD is going to have a significant advantage over rival companies. Preferential financing for hand-picked firms from the EBRD also is a way of deterring new companies from getting started since there is not a level playing field or honest competition. … cronyism is a threat to prosperity. It means the playing field is unlevel and that those with political connections have an unfair advantage over those who compete fairly. To make matters worse, nations that receive funds from the ERBD already get dismal scores from Economic Freedom of the World for the two subcategories (“government enterprises and investment” and “business regulations”) that presumably are the best proxies for cronyism.

    Here’s a chart from the study showing that recipient nations already get low scores from Economic Freedom of the World for variables that reflect the degree of cronyism in an economy.

    Last but not least, I warn that the EBRD enables and facilitates corruption.

    When governments have power to arbitrarily disburse large sums of money, that is a recipe for unsavory behavior. For all intents and purposes, the practice of cronyism is a prerequisite for corruption. The EBRD openly brags about the money it steers to private hands, so is it any surprise that people will engage in dodgy behavior in order to turn those public funds into private loot? …Recipient nations get comparatively poor scores for “legal system and property rights” from Economic Freedom of the World. They also do relatively poorly when looking at the World Bank’s “governance indicators.” And they also have disappointing numbers from Transparency International’s “corruption perceptions index.” So, it’s no surprise that monies ostensibly disbursed for the purpose of development assistance wind up lining the pockets of corrupt insiders. For all intents and purposes, the EBRD and other dispensers of aid enable and sustain patterns of corruption.

    And here’s the chart showing that recipient nations have poor quality of governance, which means that EBRD funds are especially likely to get misused.

    I also cite several EBRD documents that illustrate the bureaucracy’s hostility for free markets and limited government.

    Just in case you didn’t want to watch the entire video, here’s the relevant slide from my presentation.

    And remember that your tax dollars back this European bureaucracy. Indeed, American taxpayers have a larger exposure than any of the European countries.

    P.S. I’m also not a fan of the United Nations, though I take comfort in the fact that the UN is not very effective in pushing statist policy.

    P.P.S. I’m most tolerant of the World Bank, though that bureaucracy periodically does foolish things as well.

    Reprinted from International Liberty.

    Daniel J. Mitchell

    Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.

  • Steel Tariffs Are Already Hurting Steel-Using Industries

    Economists and industry leaders predicted price increases and potential jobs losses after the Trump administration imposed tariffs on steel and aluminum. What may have seemed like rhetoric is now reality.

    The sneaky brilliance of the tariffs is that benefits are concentrated to a small, politically connected, and very vocal few, while costs for American consumers are widely dispersed.

    That fact skews the narrative, but meanwhile, scores of American businesses are suffering the consequences.

    Kennedy Fabricating

    The House Ways and Means Committee in April held a hearing on the effects of tariffs. Among those testifying at that hearing was Kevin Kennedy, the president of Kennedy Fabricating.

    Kennedy Fabricating is a company that uses steel and, according to its website, is “the leading custom steel fabricator serving the [telecommunications] industry in the southern U.S. and is a preferred vendor with numerous national cell tower owners, operators, and general contractors.”

    In his testimony, Kennedy spoke about how the family-owned business survived many economic hardships, including the 2008 market crash, but said that the steel tariffs seem like the worst thing to happen to the company yet.

    [W]ithout any competition, U.S. steel producers have raised prices over 40 percent. Why should we pay 40 percent more here than our foreign competitors pay in their countries?

    This means that a company in China can now purchase a raw steel beam from a Chinese mill at a 40 percent discount, drill two holes in it, and ship it to the U.S. as a fabricated good without a tariff.”

    Furthermore, he added, “it’s not just China. One of our Canadian competitors just went from a position of losing projects to us to now winning projects at our expense, because they can import raw steel to Canada without a tariff and purchase it 40 percent cheaper than we can from our own domestic suppliers.”

    Kennedy Fabricating isn’t the only company being hit hard. In fact, many companies are appealing to the government for exemptions from the tariffs.

    Coalition Building

    So many companies are being affected that many of them joined forces to form the Coalition of American Metal Manufacturers and Users. The coalition’s spokesman, Paul Nathanson, explained the problems with the new tariffs:

    These tariffs will do nothing to uphold their stated purpose of protecting U.S. national security. They will instead hurt U.S. manufacturers in the near term by raising the price of the essential inputs they need to make finished products, and do long-term harm to domestic steel producers by eroding their own customer base.”

    Another group similar to the Coalition of American Metal Manufacturers and Users had the opportunity to make its voice heard at the Ways and Means Committee hearing. The Motor & Equipment Manufacturers Association comprises more than 1,000 companies that manufacture vehicle parts.

    Ann Wilson, senior vice president of the association, testified about the tariff-exclusion application process and the issues companies have experienced:

    “The [exclusion] process is already creating significant burdens on these companies,” Wilson said. “The exclusion-request process lacks transparency and will be particularly burdensome for small manufacturers. It is unbalanced and appears to not allow for successful outcomes for downstream users.

    The process established by the Commerce Department penalizes American companies for using imported goods as inputs, even if the source country is a free-trade partner and the imports in question are being sold at market value.

    Let’s hope that the Trump administration will heed these companies’ warnings and put an end to these ineffective and dangerous tariffs soon.

    Reprinted from The Daily Signal. 

    Tori Whiting

    Tori Whiting is a research associate in the Center for Free Markets and Regulatory Reform at The Heritage Foundation.

    This article was originally published on FEE.org. Read the original article.